2022-23 Half-Yearly Review: Economic Outlook

2022-23 Half-Yearly Review: Economic Outlook

Overview

Since the 2022-23 Budget, NSW economic growth outcomes have been stronger than expected. The NSW economy has made a solid recovery but faces global headwinds.

The strong momentum in the labour market has persisted. The participation rate is close to record highs and the unemployment rate is near its lowest level in almost 50 years.

However, the economic growth outlook has been downgraded for 2022-23 to 2024-25 and upgraded in 2025-26. The downward revisions are largely due to higher-than-expected inflation, geopolitical uncertainty and a faster tightening of monetary policy by central banks globally, including the Reserve Bank of Australia (RBA).

The rate of inflation is at its highest in more than three decades. Key drivers of inflation, such as disruptions to global supply chains due to COVID-19, have been easing. Consequently, inflation has likely peaked in the December quarter 2022 and is now forecast to ease from here onwards.

Labour market conditions are expected to remain supportive of stronger wages growth, which will help households dealing with cost-of-living pressures.

Economy remains resilient

Better-than-expected employment growth, along with a continuing normalisation of consumer spending patterns following pandemic disruptions, have contributed to a solid recovery in consumer spending. This has driven economic growth outcomes that have so far been stronger than expected at the 2022-23 Budget.

However, energy price shocks, lingering supply issues and strong demand from consumers, businesses and government have added to inflationary pressures, driving a faster-than-anticipated tightening of monetary policy.

Going forward, these factors are expected to moderate economic growth from its recent fast pace.

Table 1 : Economic Performance and Outlook (a)

 

2021-22

2022-23

2023-24

2024-25

2025-26
 

Outcomes

Revised Forecast

Revised Forecast

Revised Forecast

Revised Forecast

Real state final demand

3.3

5¼ (5½)

1 (1¾)

2½ (2¼)

2¾ (2)

Real gross state product

1.8

3¾ (4¼)

1½ (2¾)

2¼ (2½)

2½ (1½)

Employment

0.9

5½ (3)

¾ (1)

1¼ (1¼)

1 (1)

Unemployment rate (b)

3.6

3½ (3¾)

4½ (3½)

4 (3½)

4 (3¾)

Sydney consumer price index

3.9

7 (5½)

3½ (3)

2¾ (3)

2½ (2¾)

Wage price index

2.4

3¾ (3½)

4 (3¼)

3½ (3¼)

3¼ (3¼)

Nominal gross state product

7.4

10¼ (9¾)

2¼ (4½)

3¼ (3)

4 (3¼)

Population (c)

0.7

1.0 (0.6)

1.2 (1.0)

1.2 (1.1)

1.2 (1.1)

(a) Forecasts are rounded to the nearest quarter point and are annual average per cent change, unless otherwise indicated. Budget forecasts in parenthesis
(b) June quarter, per cent
(c) Per cent change through the year to 30 June. Forecasts rounded to nearest 0.1 percentage point.

Note: Commodity prices are assumed to follow Consensus forecasts. The RBA is assumed to increase interest rates further in the first half of 2023, broadly in line with expectations derived from surveys of professional economists and financial market pricing at the time forecasts were completed. The Australian dollar trade-weighted index is assumed to average 64.2 across the forecast period. 

Source: ABS and NSW Treasury

 

Labour market recovery

The NSW labour market has tightened since the 2022-23 Budget, with employment increasing at a brisk pace. The unemployment rate dropped to a 47-year low of 3.0 per cent in October 2022.

Demand for labour has been strong, but supply has been constrained by international border closures, which has interrupted the flow of overseas workers to New South Wales. This has contributed to tight labour market conditions. There are currently almost as many job vacancies in New South Wales as there are unemployed people, compared with the pre-pandemic level of about 0.4 vacancies for each unemployed person.

With borders now open and self-isolation requirements removed, labour supply will be less constrained. Additionally, leading indicators of labour demand (such as job advertisements and job vacancies) have eased, although they remain elevated compared to pre-pandemic levels.

Participation in the workforce has been high, with women’s workforce participation faring particularly well. The NSW female participation rate reached a record high of 62.3 per cent in November 2022, which is 2.2 percentage points higher than before the pandemic. The disparity between male and female participation has continued to shrink, hitting record lows since the 2022-23 Budget.

Women’s workforce participation continues to grow as part of an historical upward trend. Societal norms and supportive government reforms for education, childcare and paid parental leave have reduced the barriers for women to participate in the workforce.

NSW participation rate by gender

Source: Australian Bureau of Statistics

COVID-19 risks and uncertainties

The outlook is subject to a high degree of uncertainty, including how households and businesses will respond to higher interest rates. Additionally, the prospect of a more severe global economic downturn is a significant downside risk, given the degree of monetary tightening by central banks to date. Many central banks are still expected to pursue near-term interest rate rises, but further changes in monetary policy will depend on the outlook for inflation, which remains uncertain. Other global risks include a deterioration in geopolitical tensions and the possibility that China’s economic growth remains constrained, although Chinese authorities have recently shifted away from their strict zero COVID-19 strategy.

Upside risks include more exuberant households, which would lead to lower precautionary savings, keeping household consumption above forecast levels. There is also the possibility that global supply constraints are fully resolved more quickly than currently anticipated, leading to inflation falling faster and negating some of the need for additional central bank tightening globally.