Economic outlook 2023


8th February, 2023

Economic outlook for 2023: 5 reasons to be optimistic

The economic outlook has left many with the expectation that a recession’s on the way, but there are reasons for business owners to be positive in 2023.

According to textbooks, economies function predictably.

The traditional cycle looks something like this: central banks lower interest rates, then people take advantage of ‘cheap money’ to buy houses and start businesses and the economy booms. But then an overheating economy creates inflation. This forces central banks to raise interest rates, which in turn restricts would-be homebuyers and business-starters and reduces the disposable income of those with a home or business loan. This then ‘cools’ the economy and inflation drops.

So, if central banks in many countries jack up interest rates to tame the worst outbreak of inflation in decades, it’s sure to cause a savage global recession, right?

With recent MYOB research revealing a growing number of business decision makers are concerned about an impending downturn, in this article I present the five main reasons for you to remain positive.

1. Economies don’t work the way they used to

In recent times, economies haven’t been behaving by the book.

There was a long period of near-zero interest rates after the GFC, but for a long time economies didn’t overheat and inflation stubbornly refused to rise.

Likewise, though interest rates have now been ratcheting up in Australia and New Zealand in recent months, significant sections of their economies are still running red hot.

The unemployment rate in both countries is still at historic lows. True, lots of tech companies have been making staff redundant, but the evidence suggests tech staff aren’t finding it difficult to find another job and that businesses outside the tech sector are more likely to be hiring employees than firing them.

Those paying off a home or business loan do have less disposable income than they did this time last year, but judging from the Christmas sales figures in Australia and those from New Zealand, consumers are still spending freely.

In the face of all this good news, even journalists who’ve spent months talking up the prospect of a looming economic catastrophe have started walking back some of the more hyperbolic claims.

2. Australian and New Zealand economies are generally well-managed

They don’t get much thanks for it, but politicians on both sides of the ditch have managed their economies relatively well for the last four decades.

Painful reforms were undertaken in the 1980s that set both economies up to thrive and thrive they have. Until COVID-19 turned up, Australia hadn’t had a recession since the early 1990s. New Zealand hasn’t been quite so fortunate, but in recent decades its downturns have been short and shallow.

3. China’s demand for local exports is likely to return

Cynics might argue that Antipodean prosperity is more about good luck than good management, and that Australia and New Zealand have prospered due to their proximity to a rising China, rather than from the brilliance of their public servants and business leaders.

If that is true, there’s even more reason for hope.

China’s appetite for Australian and New Zealand exports has benefitted both economies enormously and was a large part of the reason they sailed through the GFC relatively unscathed. (Australia didn’t go into recession at all; New Zealand did so only briefly.)

But both countries have suffered since early 2020 from China regularly shutting down its economic hubs in pursuit of zero-COVID. Australia has suffered the added blow of having an aggrieved China punish it by putting hefty tariffs on, or otherwise discouraging the purchase of Australian coal, timber, barley, wine and lobster and discouraging Chinese students from enrolling in Australian universities.

China has abandoned its zero-COVID policy and is in the process of restoring normal relations with Australia.

After three long years of closed borders and shutdowns, Chinese consumers, tourists and students will once again return to enjoy all Australia and New Zealand have to offer.

4. India’s growing economy will add further demand

China’s population has started to shrink and its days of double-digit annual GDP growth are probably behind it. It’ll remain the world’s second-largest economy for the foreseeable future and continue to import an enormous amount of Antipodean goods and services. But all the ‘low-hanging fruit’ have now been picked.

Fortunately, both Australia and New Zealand have an excellent relationship with another emerging economic giant: India.

India’s economy is likely to expand dramatically in the coming years and import lots more agricultural products and minerals. Also, many more newly affluent Indians are likely to come to Australia and New Zealand for a holiday or to study.

The Australia-India Economic Cooperation and Trade Agreement came into force in the final days of 2022. Australia can now expect to start exporting more food, minerals, machinery and financial and telecommunications services to India as a result.

New Zealand is yet to sign a free-trade agreement (FTA) with India, but whether or not India and New Zealand enter into a bilateral or multilateral FTA agreement, New Zealand is likely to sell even more timber, agricultural products and educational services to India in 2023 and beyond.

5. Hopes for peace benefit economic prospects

Nothing impacts national economies quite like international conflict.

For much of 2022, many experts were worried that the Russia-Ukraine and China-Taiwan conflicts could escalate. At the time of writing, there are hopes that the Russia-Ukraine dispute won’t escalate and may end in a negotiated settlement in the coming months.

And while a Chinese invasion of Taiwan remains a hypothetical concern, the general consensus is that Xi Jinping currently has more than enough to worry about on the home front and is unlikely to risk war with the US and its allies anytime soon.

Conclusion? The glass is half full

Bad news sells newspapers and economists are famous for predicting nine of the last five recessions, but that doesn’t mean business owners won’t face challenges this year or that they are immune from being blindsided by unexpected events.

Despite this, there’s good reason to hope for the ‘soft landing’ policy makers and central bankers are aiming for in both economies, even if the era of cheap money is behind us.

Business owners in Australia and New Zealand still have plenty to be thankful for and could have a much better year than they expected to, especially if they’ve been putting away emergency savings funds and have worked hard to find efficiencies through optimising their systems and processes.