- Article
- Global Research
- General Research Insights
Australian Economic Comment - Two large economic shocks Australia grappling with
Australia is grappling with two large economic shocks at the same time. One is weighing on growth and inflation, the other is boosting these. The first is well covered by the media and analysts, the second is not as often discussed in these terms. Both are substantial and both impact each other. The first is, you guessed it, the sharp rise in interest rates. The second is the substantial, recent and surprisingly large surge in inward migration that is sharply boosting population growth.
On the first shock – interest rates – the RBA has already lifted its cash rate by 400bp. The tightening of financial conditions this has delivered is working to slow growth, primarily by weighing on consumer spending. Household disposable incomes have been falling in real terms, hampered by high inflation, rising taxes, as well as the rise in interest rates. Household consumption is falling on a per capita basis.
Part of the reason for the powerful effect of higher interest rates is that most of Australia’s mortgages are at variable rates, so the transmission of the RBA’s tightening to the household sector has been rapid (in contrast, for example, to the US where most mortgages are fixed for 30 years).
The weakening of consumer spending has slowed the pace of overall GDP growth – which is below trend, albeit GDP is not falling outright (see The complicated consumer, 16 October 2023).
At the same time, though, the economy is being supported by a substantial surge in population growth.
The pick-up in population has been far greater than had been expected. As recently as late 2022, the government’s fiscal forecasts assumed that there would be net inward migration of 235k people in financial year 2022/23. The current run rate suggests that almost 500k people actually arrived.
Part of the reason for the surge is that many visas that were applied for during the pandemic, but not processed at the time because the border was closed, were subsequently approved when the border re-opened.
Another driver has been the return of international students, many of whom were enrolled, but studying virtually from offshore when the border was closed, but then moved to Australia when it was possible to do so. Foreign student number arrivals surged earlier this year and are back above the pre-pandemic levels.
For the economy, the surge in inward migration boosts both demand (for goods, services and housing), and supply (primarily of labour).
Most obviously, the migration surge has delivered a vivid effect on the housing market (a point we have been making since earlier this year, see Housing prices steadying earlier than expected, 19 April 2023).
Even though interest rates have risen and housing prices had initially fallen as a result of this tightening, they have been rising recently due to the population surge.
Standard forecasting models suggest that a 400bp rise in interest rates might typically see housing prices fall by 15-20%; however, housing prices fell by only around 10% between mid-2022 and early 2023, before rising by 8% since then.
The surge in population growth helps to explain the turnaround. These models also include measures on rental yields that respond to the balance of supply and demand in the housing market. The surge in inward migration has been a surprise, which has driven a sharp fall in rental vacancy rates and a rapid rise in rents, which have in turn also supported housing prices, despite the rise in interest rates.
Stronger-than-expected population growth has also boosted demand for goods and services. Although per capita household consumption has been falling – as we describe above and is evidence that monetary tightening is working – overall household consumption growth is still positive, despite slowing. With many more people in the economy, there are also many more consumers.
Strong inward migration is also boosting labour supply. Partly as a result of this, the labour market is loosening, albeit very slowly. New migrants are filling roles, and helping to meet some of the acute skills shortages that were apparent in 2022.
For monetary policy the key is to assess the balance of these positive and negative shocks for growth and inflation. Our model-based estimates suggest that a positive shock to migration is net inflationary in the short run (see Migration and inflation, 22 June 2023).
Importantly, managing this sort of challenge is one of the great strengths of an inflation-targeting regime (see Inflation targeting Downunder: Is IT really it?, 6 April 2018). Inflation reveals the nexus of demand and supply in the economy. If inflation is higher than target, or rising, then demand may be too strong and, if it’s lower, the opposite could apply.
Last week’s inflation print provided a clear signal that underlying inflation is not falling as fast as the RBA had been expecting. The central bank had been forecasting that the trimmed mean would fall to 4.8% y-o-y in Q3, but the print was 5.2% y-o-y. That is a material upside surprise.
Much of the strength in inflation is being driven by services prices. Rents are part of this story, but the momentum in inflation is fairly broad-based
Amongst the many factors at work, the significant upside surprise to population growth is playing a role. Given the magnitude of the upside surprise to population growth, it should perhaps be unsurprising that inflation is still stronger than was expected.
Our view is that the RBA will lift its cash rate by 25bp in November. Although inflation is down from its peak rate and the jobs market is slowly loosening, getting inflation back to the RBA’s target band by the second half of 2025 (as the central bank is aiming for) will likely require some further tightening of financial conditions.
This is a Free to View version of a report with the same title published on 30-Oct-23. Please contact your HSBC representative or email AskResearch@hsbc.com for more information.
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: HSBC Bank Australia Limited
View HSBC Global Research at: https://www.research.hsbc.com/
The following analyst(s), who is(are) primarily responsible for this document, certifies(y) that the opinion(s), views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Bloxham
This document has been issued by the Research Department of HSBC.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures
1 This report is dated as at 30 October 2023.
2 All market data included in this report are dated as at close 29 October 2023, unless a different date and/or a specific time of day is indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited, which has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. Neither The Hongkong and Shanghai Banking Corporation Limited nor any member of its group companies (“HSBC”) make any guarantee, representation or warranty nor accept any responsibility or liability as to the accuracy or completeness of this document and is not responsible for errors of transmission of factual or analytical data, nor is HSBC liable for damages arising out of any person’s reliance on this information. The information and opinions contained within the report are based upon publicly available information at the time of publication, represent the present judgment of HSBC and are subject to change without notice.
This document is not and should not be construed as an offer to sell or solicitation of an offer to purchase or subscribe for any investment or other investment products mentioned in it and/or to participate in any trading strategy. It does not constitute a prospectus or other offering document. Information in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.
The decision and responsibility on whether or not to purchase, subscribe or sell (as applicable) must be taken by the investor. In no event will any member of the HSBC group be liable to the recipient for any direct or indirect or any other damages of any kind arising from or in connection with reliance on any information and materials herein.
Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors.
This document is for information purposes only and may not be redistributed or passed on, directly or indirectly, to any other person, in whole or in part, for any purpose. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. By accepting this report, you agree to be bound by the foregoing instructions. If this report is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document.
HSBC and/or its officers, directors and employees may have positions in any securities in companies mentioned in this document. HSBC may act as market maker or may have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell or buy securities and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented on the supervisory board or any other committee of those companies.
From time to time research analysts conduct site visits of covered issuers. HSBC policies prohibit research analysts from accepting payment or reimbursement for travel expenses from the issuer for such visits.
The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority.
© Copyright 2023, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of insert issuing entity name. MCI (P) 017/01/2023, MCI (P) 027/10/2022
