No rate cuts until Q2 next year, while Australia’s 2050 targets ‘aspirational’ as opposed to likely: Oxford Economics Australia
Trump victory would provide equity markets with short-lived sugar hit but policies to limit trade and population growth will ultimately limit the US’ potential growth rate
While Net Zero 2050 is ‘aspirational’, Australia is broadly on track to hit its 2030 climate target to reduce emissions by 43 per cent relative to 2005 levels
Housing supply to climb in the back half of the decade, reaching 220,000 total dwelling completions in FY29
Publicly funded transportation boom has driven domestic engineering construction activity to record highs, to peak at over $37bn in FY25
Sydney, Australia – Despite headline inflation expected to be very close to the top of the RBA’s target range by the end of 2024, with utilities subsidies providing much of the disinflation impetus, the RBA will largely ignore the headline data and won’t introduce rate cuts until Q2 next year.
Meanwhile, policy shifts at both the state and federal level, combined with substantial pent-up housing demand, provide a firm platform for the next residential building upturn, and work on the publicly funded transportation infrastructure book is set to peak in FY25. However, while Australia is broadly on track to hit its 2030 climate target to reduce emissions by 43 per cent relative to 2005 levels, its 2050 targets remain aspirational rather than likely.
These are the key takeaways from Oxford Economics Australia’s bi-annual economic outlook and construction conferences, taking place in Sydney tomorrow (Tuesday, September 17) and Melbourne on Thursday (September 19). The conferences will explore the major economic outlook and trends for the year ahead and navigate where opportunities for growth can be found. Sessions will provide delegates an opportunity to get a deep dive into major sectoral topics including Construction, Real Estate, Housing, Climate and Sustainability.
Oxford Economics Australia’s economists are releasing some of their key findings ahead of the conference. More analysis and forecasts will be unveiled at each conference session this week.
Is the Australian economy out of the woods?
“The Australian economy is facing strong cross currents that are making for a challenging outlook and environment for policy makers,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia. “The labour market has defied a marked slowdown in activity, which is testing the RBA’s very patient approach to bringing inflation back to its target.
“Concurrently, a significant easing in fiscal policy will give the economy a boost, which is welcome for households, but less so for inflation hawks.”
There has been a small tick up in some confidence indicators, and retail sales were firm in July. But it is still difficult to say whether tax cuts will overcome cost of living pressures and drive a recovery in consumption, according to Oxford Economics Australia. Meanwhile, headline inflation will be very close to the top of the RBA’s target range by the end of 2024.
“But with utilities subsidies providing much of the disinflation impetus, the RBA will largely ignore the headline data,” said Langcake. “Given the RBA’s hawkish rhetoric, we don’t see rate cuts coming until Q2 2025.”
Productivity growth is a sharp focus for policymakers as any improvement will improve the inflation outlook. But Australia is once again in a productivity slump that deepened in Q2.
“We have become a little more bearish on the productivity outlook,” said Langcake. “Artificial Intelligence (AI) looms as a source of upside potential, but uncertainty around its impacts abounds.”
The economic outlook for Australia: The key global trends shaping Australia’s future
“The Australian economy is set to be buffeted by a diverse set of global, market shifting forces,” said Langcake. “The rest of the year will see key elections and possibly new policy directions in major trading partner economies, headlined by the US election. Further afield, policymakers are grappling with finding optimal policy responses in economies facing larger and more frequent supply shocks.”
Oxford Economics believes a Trump victory would provide equity markets with a short-lived sugar hit. But policies to limit trade and population growth will ultimately limit the US’ potential growth rate. In either event, direct impacts on the Australian economy are expected to be small.
“The impacts of AI adoption are one of the major factors behind our optimistic outlook for the US economy,” said Langcake. “Other advanced and services-oriented economies such as Australia are relatively well placed to benefit from a productivity boost, but the impacts will be smaller for later adopters.”
Finally, goods inflation is highly correlated globally, according to Oxford Economics.
“Trade disputes that push production away from lowest cost economies are likely to increase inflation volatility and potentially interest rates in the medium term,” said Langcake. “Climate risks pose similar threats and are taking an increasing role in central banks’ planning.”
Trade in Turbulent Times: Adapting to Geopolitical Volatility
“Global Trade has been shaken by several headwinds this year including supply chain disruptions and geopolitical tensions. While some of these headwinds have peaked others are still looming large,” said Ben Udy, Lead Economist, Macro Forecasting and Analysis, Oxford Economics Australia.
While the US has reduced its direct trade reliance on China, its indirect exposure is less clear as many exporters have diverted trade through third-party countries.
“We suspect global shipping costs have reached a peak, but even if they surprise us and rise further, we expect the impact on inflations to be small.,” said Udy.
Climate change: Australia's journey to net zero and its economic implications
“Australia’s road to net zero is proving to be bumpy,” said Kristian Kolding, Head of Consulting, Oxford Economics Australia. “Over the last six months we’ve seen the first auction of the Capacity Investment Scheme, major policy announcements towards a Future Made in Australia and significant uptake of grants to decarbonise hard to abate sectors.
“But at the same time, we’re emitting record levels of emissions from transport and appear to have re-ignited the ‘climate wars’ as the Coalition pushes for the rollout of nuclear energy to supplement renewables.
“Our baseline forecast suggests we’re broadly on track to hit our 2030 climate target to reduce emissions by 43 per cent relative to 2005 levels. That said, achieving net zero by 2050 remains aspirational as opposed to a most likely outcome.”
Carbon conscious land use and renewable electricity is set to drive the green transition to 2030, but the path to decarbonising transport and industry remains shrouded in uncertainty.
“That’s ok for now, but clarity will be required sooner rather than later to set a credible 2035 emission target and create an equitable and manageable transition to net zero by 2050,” said Kolding.
Oxford Economics Australia believes there are plausible and relevant futures where the green transition is achieved ahead of schedule and temperatures increases remain well below 2 degrees, but there are also significant risks of delays which results in a significant warmer and more volatile environment in years to come.
“We applaud the recent amendment to the Australian Sustainability Reporting Standards to require businesses to describe the transition risks and opportunities for their business in a net zero future as well as the physical challenges associated with a warmer and more volatile scenario.”
Beyond climate scenarios, the introduction of sustainability reporting standards is leading to a greater focus on Scope 1,2 and 3 emissions, which should further drive fundamental shifts in industries across the country as businesses look to avoid financial repercussions.
“Measuring scope 3 emissions will be the most challenging of these requirements as companies will need to overcome data limitations from their supply chain and in the way consumers use their products,” said Andrew Tessler, Head of Economic Impact Analysis at Oxford Economics. “Big businesses and heavy polluters will be required to adhere to the Australian Sustainability Reporting Standard from January 2025, with smaller businesses being included over the following two years.”
Residential building at a turning point?
Higher construction costs and interest rates have dragged on housing demand and private investment. Delays and builder administrations have further supressed the confidence of developers and home buyers alike.
“However, juxtaposed by strong population growth powering underlying demand, the Australian building sector is primed for a broad upturn once conditions become more supportive,” said Maree Kilroy, Senior Economist at Oxford Economics Australia. “Leading indicators suggest we are at the bottom of the cycle for key segments, particularly houses, though initial growth is expected to be modest.”
Oxford Economics Australia forecasts that a slowdown is looming for migration, with recent policy tweaks focused on international student flows expected to see net overseas migration halve from the current boom level to 250,000 by FY26.
Meanwhile, announced policy shifts at both the state and federal level, combined with substantial pent-up housing demand, cement a firm platform for residential activity to ramp up in the second half of the decade.
“We expect supply to climb in the back half of the decade, reaching 220,000 total dwelling completions in FY29,” said Kilroy. “However, industry capacity represents the most significant downside risk to the outlook for new housing. Persistent shortages of skilled trade labour will place a speed limit on the early-to-mid stage recovery. Construction insolvencies are expected to continue to surge over 2024, while issues with utility connections across our major cities may also act as a drag near term.”
How much further can engineering construction activity grow?
“The publicly funded transportation boom has driven domestic engineering construction activity to record highs,” said Dr Nicholas Fearnley, head of global construction for Oxford Economics Australia. “As this boom comes to an end work will transition towards the utilities sector where investment is being spurred on by the move towards net-zero and long-term concerns around water security. A lot of this work will be done in regional areas, which will further test the industry’s capacity to deliver this work.”
Oxford Economics Australia forecasts that work on the publicly funded transportation infrastructure book is set to peak at over $37bn in FY25. Total engineering construction activity will continue to grow over FY26, supported by growth in mining investment and the decarbonisation of the electricity network.
“Growing population and aging water assets have highlighted long-term concerns around water security,” said Dr Fearnley. “The water sector risks facing severe capacity challenges – particularly if drought conditions were to return – as it competes with both hydroelectric storage dams and hydrogen plants for skills, materials and equipment.
“Growth in maintenance spending is slowing as the ramping up in LNG maintenance requirements comes to an end. Technological changes in both the electricity and telecommunications industries, and adoption technology to monitoring and maintaining assets are set to subdue maintenance spending across a number of asset classes.”
About Oxford Economics Australia
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