Economist Greg Jericho described what awaits us as “bleak” and warned Australia is in for “a shocker” of a year, based on the latest outlook from the International Monetary Fund.

It has revised economic growth projections here down from 1.7 per cent to a “historically bad” 1.2 per cent, Mr Jericho noted in analysis published by The Guardian.

“From the end of the 1990s recession to the year before the pandemic, median annual GDP growth was 2.9 per cent,” Mr Jericho wrote.

“The IMF does not expect us to achieve annual growth greater than 2.3 per cent out to 2028.”

There will be many flow-on effects from a slowing economy, ranging from rising unemployment to what the Reserve Bank does next with interest rates.

High rates are here to stay

Investment management firm Vanguard’s full economic and market outlook, released in mid-December, cautions that “higher interest rates are here to stay”.

“Even after policy rates recede from their cyclical peaks, in the decade ahead rates will settle at a higher level than we’ve grown accustomed to since the 2008 Global Financial Crisis,” the report reads.

The economic impacts of that scenario, both here and abroad, “will be profound”.

“Borrowing and savings behaviour will reset, capital will be allocated more judiciously, and asset class return expectations will be recalibrated.”

While a higher interest rate environment will ultimately be a positive thing in the long run, “the transition may be bumpy”.

One such outcome is a deterioration in employment conditions, including lower demand, an uptick in unemployment, and a reduction in hours worked.

Vanguard expects the unemployment rate in Australia to rise from its current low of 3.8 per cent to 4.75 per cent this year.

But the RBA has noted that rising unemployment will help drive a reduction in red-hot inflation – the main driver of its rapid run of interest rate hikes.

The RBA is forecasting a reduce in inflation by 3.5 per cent by the end of the year.

But that trajectory is slower than hoped, meaning interest rates will need to stay high for longer.

While many economists expect the RBA to begin lowering the official cash rate towards the back-end of 2024, Vanguard’s view is much more pessimistic.

It doesn’t expect any change to the current 4.35 per cent rate this year.

But Commonwealth Bank chief economist Stephen Halmarick believes the RBA will achieve its “narrow path” to smashing inflation.

Mr Halmarick forecasts that the cash rate will fall by 75 basis points in the second half of the year, beginning in September, with another 75 basis points slashed in 2025.

Resilient economy set to slow

Australia’s economy has remained surprisingly resilient in the face of a worsening cost-of-living crisis, rising interest rates and persistently high inflation.

A review of conditions by the IMF noted that “unemployment remains low, output [is] above potential, and housing prices have picked up after a correction in 2022”.

“After a strong post-pandemic recovery, Australia’s economy is slowing but remains resilient,” its report read.

“GDP growth slowed to 2.1 per cent [year-on-year] in [the third quarter of 2023], from 3.7 per cent in 2022, as consumer demand slowed in real terms, due to a decline in real household disposable income driven by higher inflation and higher mortgage interest rates.

“Net exports also contributed to growth on the back of robust sales of iron ore and coal, and a strong rebound in tourism and education.

“Output is estimated at around one per cent above potential, with unemployment remaining at a low rate.”

Vanguard’s forecast for economic growth is between 0.75 per cent to 1.25 per cent, on par with many other measures, which is well below trend.

That view is shared by the Reserve Bank, which in its November monetary policy statement revealed it expects the economy to “remain below trend … as cost-of-living pressures and higher interest rates continue to weigh on demand”.

Consulting firm KPMG’s latest economic outlook credits “extraordinary levels of population growth via overseas migration” with staving off worse economic conditions last year.

“Australia’s population has been estimated to have increased by nearly 630,000 people over the year to 30 June 2023 – an increase of 2.4 per cent,” it notes.

“This population growth has underpinned consumption and investment and has provided the government large volumes of unplanned tax revenues allowing a reversal of fortunes in budget outcomes.”

How long that continues is unclear.

The Commonwealth Bank is relatively upbeat about what lies ahead, although it has acknowledged a series of challenges for the economy.

“Looking ahead, 2024 will have more than its fair share of risks and challenges, particularly geopolitical risks as well as the United States presidential election,” Mr Halmarick said.

“Despite these obstacles, the Australian economy remains in relatively good shape.”

Consulting firm Deloitte Access Economics described the nation’s economy as being on a “knife edge” in its most recent outlook note.

David Rumbens, a partner at the firm and author of its latest report, said there was significant pain being felt across the economy.

“The retail sector knows about it – trend retail growth of just 1.3 per cent is the lowest trend growth recorded since 1982, just before Australia won the America’s Cup,” Mr Rumbens said.

“Consumer confidence remains extremely fragile, near its all-time low point. Business failures have also been on the rise through 2023, centred on construction but also affecting accommodation and food services, manufacturing, and retail trade.

“However, a shaken-up Australian economy must not only deal with the cost-of-living crisis of today but also with helping Australia’s business sector look to 2024 as a year for growth.

“The business cycle will soon be past its low point and start turning up again. Real wages will start rising … and strong population growth provides foundational support.

“Beyond the short-term economic cycle, there are also significant opportunities for Australia’s businesses, through the adoption of AI, and from the necessary transformation to net zero emissions by 2050.”

Global economic headwinds will be felt in Australia in the short-term, with Vanguard warning that Europe’s predominantly bank-based economy “is already flirting with recession” and China’s rebound from Covid has been “weaker than expected”.

It also anticipates the US economy to experience a “mild downturn” – but it’s one that’s necessary to get inflation there under control.

However, America’s chances of avoiding a recession and instead experiencing a “soft landing” remains a possibility.

“High interest rates, persistent inflation and the slowdown in China, particularly its struggling property sector, are all weighing on the global outlook,” Treasurer Jim Chalmers warned late last year.

The outlook for housing

Like the other big banks, the Commonwealth Bank is forecasting continued increases in home prices across 2024, albeit at a more modest rate than has been seen lately.

It expects values to rise by five per cent at a national level, which is considerably smaller than the 9.6 per cent surge that occurred last year.

“A slowdown in net migration – as well as consistent and co-ordinated measures to increase the supply of new dwellings – will be critical to restoring some balance to the Australian housing market,” Mr Halmarick said.

Meanwhile, rival bank NAB is forecasting an increase in home prices across the capital cities of 5.4 per cent this year, with Brisbane leading the charge with a 6.5 per cent growth rate, followed by Adelaide (6.2 per cent) and Perth (6.2 per cent).

The bank expects prices to rise in Sydney by five per cent and in Melbourne by 5.5 per cent.

At a national level, Westpac expects home prices to rise six per cent across the year, with the biggest increases seen in Perth (10 per cent), Brisbane (eight per cent), Sydney (six per cent), and Adelaide (six per cent).

ANZ is also tipping a six per cent increase in home values at a national level, with a severe shortage of housing putting a floor beneath prices.

When it comes to rental markets, millions of tenants battling skyrocketing prices, limited supply and intense competition are unlikely to receive relief anytime soon.

Tim Lawless, research director at data house CoreLogic, said rent prices nationally rose by 8.3 per cent across 2023.

While that was down on the 9.5 per cent increase seen in 2022, it was four times the decade average seen pre-Covid.

“In dollar terms, the annual rise in dwelling rents equates to approximately $46 more per week based on the median rental value,” Mr Lawless said.

“Considering we are yet to see any material response in rental supply, growth in rents is likely to remain above average in 2024.”