AU Economic Outlook — March 2023

In this month’s Outlook, we discuss:

• the release of the ABS December quarterly report and what it means for the Australian economy
• the Reserve Bank of Australia’s plans to increase interest rates in response to inflation.

We also explore the challenges facing small businesses in the current economic climate and provide insights on how they can adapt to overcome them.

Finally, we take a look at the exciting and disruptive world of humanoid robotics, and how it is poised to become a reality in our everyday lives.

Economic Outlook

During February, ABS released its December quarterly report which largely confirmed what we already knew about inflation, interest rates and the economy more generally.

According to ABS data (releases on 1 March 2023) , Australia’s economy grew by 0.5% in the December quarter of 2022, and by 2.7% compared to the previous year, which marks the fifth consecutive quarter of growth since COVID-19 Delta variant lockdowns. This growth was primarily driven by international trade, with exports rising by 1.1% and imports falling by 4.3%. However, the economy experienced significant price pressures, with consumer prices increasing by 1.9% during the December quarter, and 7.8% compared to the previous year, which was the highest annual increase in inflation since 1990.

Households showed caution in their purchases of discretionary goods, with household consumption rising by a more subdued 0.3% during the quarter, and retail sales falling by 3.9% in December 2022. Furthermore, households only saved 4.5% of their income during the quarter, which is down from 7.1% in the previous quarter, and 6.8% in the pre-pandemic December quarter of 2019. The Australian labour market continued to remain tight, with private sector wages rising by 0.8% in the December quarter, and by 3.6% compared to the previous year, which was the highest annual rate of growth since September quarter 2012.

Investment in new dwellings increased by 1.4%, and mining production grew for the third quarter in a row. The domestic aviation industry continued its recovery, with travel services and coal driving exports. Finally, the current account recorded a surplus due to an increase in the trade surplus and a narrowed income deficit, with the trade surplus being the second-highest on record. However, labour productivity slumped, with GDP per hour worked falling by 3.5% through the year, the weakest on record, as the distortionary impacts of COVID-19 on workforce composition unwound. You can read the ABA’s 12 key takeaways on their website.

Regrettably it is clear that the RBA intends to keep increasing interest rates for even longer than we previously anticipated and it has cited three causes for concern. This will continue to slow the economy and put pressure on sales for Australian businesses.

In his address to the House of Representatives Standing Committee on Economics on 17 February 2023, the Governor of the Reserve Bank of Australia, identified several sources of uncertainty in the outlook for the Australian economy.

The first source of uncertainty is the global economy, which is facing challenges due to the tightening of monetary policy, high energy prices, and cost-of-living pressures.

The second source of uncertainty is the outlook for household spending in Australia, which is impacted by high inflation, rising interest rates, and falling housing prices. The third source of uncertainty is around price and wage expectations, with the need for people to expect that high inflation is only temporary. Based on the available information, the Board expects further interest rate increases to ensure that inflation returns to the target range, but they are conscious of risks in both directions and will evaluate developments frequently and respond as appropriate.

As a result leading economists have now increased their expectations for peak interest rates well into the 2023.

NAB’s outlook for the economy is positive, noting that GDP had risen by 0.5% q/q (2.7% y/y) and remained resilient to interest rate and price pressures through Q4. However, NAB expects consumption growth to stall due to the impact of higher rates. They anticipate the cash rate reaching 4.1% by May and believe the strength of Q1 CPI and high frequency measures of consumer spending will be key factors. The report also highlights ongoing resilience of consumer demand, but suggests that consumption behaviour may change in response to higher rates. NAB expects interest rates to continue to rise and anticipates that the impact of rate rises will be more fully reflected in H1 2023.

As we highlighted in our January report, the economic outlook remains challenging, with potential implications for small businesses operating in the current environment of high inflation and high employment.

These implications include cost increases, limited access to credit, reduced consumer spending, challenges in hiring and retaining employees, increased competition, and currency fluctuations. To overcome these challenges, SMEs may need to adjust their strategies, seek alternative sources of financing, explore new markets, and implement effective risk management strategies. It is crucial for businesses to have timely access to business intelligence to stay informed and mitigate potential risks.

Disruptive Technology Viewpoint

A report published by Macquarie Bank (Are we turning a corner on the humanoid robot age?) lays out the reason that humanoid robots could soon become a reality in our everyday lives. While they have struggled to make it beyond the concept phase, the rapid rise and acceptance of game-changing developments like electric vehicles and autonomous vehicles provides a test case for the humanoid robot project.

Market futurists suggest a feasible time for humanoid mass production is finally approaching, and Goldman Sachs predicts a $US6 billion market for humanoid robots within the next 10 to 15 years. Initially, demand will come from the industrial sector, but eventually, home-based market demand for humanoid robots will act as the tipping point that helps propel the humanoid product category into a $US3 trillion market by 2050.

Macquarie estimates that the total hardware cost for an early-stage humanoid robot is around $US40,000, broken down into various components including sensors and chips, inertial measurement units and torque sensors, servomotors and motor drives, precision reducers, battery and battery control system, and other parts including body materials.

For a glimpse into the future, consider Optimus, with its advanced features and potential to transform civilisation as we know it. Optimus is a humanoid robot created by Tesla. It has 11 degrees of freedom in its hands, 28 structural actuators in its muscles, and its joints are inspired by biological human joints.

Optimus uses cameras for eyes, has a microphone for ears, and a speaker for a voice. It also has a 2.3kWh battery pack and uses a Tesla AI chip as its brain. Optimus can walk forward, do a squat walk, side step, turn while walking, lift objects from the ground up to eye level, squeeze or grip an object, climb stairs, pick up an object while squatting, walk on a slope or hill, slide objects, use a drill, push and pull objects, turn with an object, and use a screwdriver.

The robot weighs 73 kilograms and can carry 9 kilograms. It can move at a speed 8 kilometres/hour and consumes 100 watts while sitting and 500 watts while walking. Optimus can connect to WiFi and LTE, and its body is made up of metal where necessary, but as much plastic as possible for weight savings.

The robot aims to be available for purchase within three years and certainly before five years, with a price tag under $20,000.