Economic overview

Global economic growth is expected to be subdued in 2024 due to expected slower household spending growth following relatively resilient consumption in 2023. World Gross Domestic Product (GDP) growth is expected to be 2.9% in 2024, below the 3.0% growth expected for 2023 and a downgrade of 0.1 percentage points since the September Agricultural Commodities Report. World GDP growth in 2024 is expected to remain well below the 10-year pre-pandemic average annual growth of 3.7%, driven by lower growth in advanced economies such as the United States.

Household consumption growth in advanced economies is expected to slow, driving subdued global GDP growth in 2024. This reflects reduced household spending as higher interest rates increase debt payments. Monetary policy tightening by central banks over the past two years (Figure 1.1), along with high inflation, have eroded household disposable incomes. The United States Federal Reserve raised the federal funds rate by 525 basis points from March 2022 to July 2023, to a target range of 5.25–5.5% – the highest level since 2001. It takes time for the full impact of higher interest rates to flow through the financial system and impact consumer behaviour, depending on the number and term of fixed interest rate loans in the economy. In Australia, where around two thirds of mortgages are on variable rates and many fixed rate mortgages are set on short-term contracts, monetary policy influences household behaviour relatively quickly. Conversely, in countries with a relatively high percentage of fixed rate mortgages like the United States, New Zealand, and the United Kingdom, higher interest rates impact new homebuyers and households looking to refinance, as well as disincentivising business investment.

Figure 1.1 Central bank key interest rates, selected economies

Risks to global economic growth and household consumption are tilted to the downside for 2024. For example:

• The unemployment rate in many advanced economies such as the United States has recently started to trend upwards. More people out of work will likely further reduce economic growth, confidence, and household consumption.
• Financial instability risks for governments, banks, and nonbank financial institutions may become more acute in 2024 from the combination of high interest rates, softer growth, and falling confidence in an environment of elevated debt. Greater financial instability typically leads to weaker business confidence, investment, and employment.
• Geopolitical tensions continue to pose downside risks to supply chains and consumer confidence. Russia’s ongoing invasion of Ukraine is contributing to weak economic growth in Europe, and the Hamas-Israel conflict is increasing geopolitical tensions in the Middle East. Caldara and Iacoviello’s Geopolitical Risk Index is currently at the highest level for 20 years outside of March 2022 when Russia invaded Ukraine (Figure 1.2).

Together, these factors and their impact on global economic growth and consumption have the potential to lower demand in some markets for Australian agricultural exports. This reflects that falling consumer confidence tends to lower spending on non-staple agricultural products such as wool, cotton, wine, dairy, and meat.

Figure 1.2 Geopolitical risk index

Economic growth in key Asian economies boosted by government stimulus

Despite lower economic growth prospects globally driven by advanced economies, the growth outlook in key Asian economies remains relatively favourable.

China’s economic growth expectations for 2024 have been boosted by government measures aimed at supporting the financial and construction sectors. The stimulus measures are expected to support business debt servicing and encourage investment. GDP growth is expected to be 5.4% in 2023 and moderate to 4.6% in 2024, in line with the trend in other major economies. This is an upgrade of 0.2 and 0.1 percentage points respectively since the September Agricultural Commodities Report. Very weak or negative growth in house prices, property investment and consumer price inflation indicate that consumer confidence levels remain relatively subdued. However, strong growth in domestic tourism, consumer services such as restaurant meals, and a recent government push to increase imports, are expected to support demand for Australian agricultural commodities. China was Australia’s most valuable agricultural export destination in 2022–23, accounting for 21% of the value of agricultural, fisheries and forestry exports.

Economic prospects in southeast Asia are expected to strengthen in 2024. GDP growth for the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) is expected to increase to 4.5% in 2024, up from 4.2% in 2023 and higher than the 10-year average. Strong growth in tourism and household spending, supported by lower inflation, is offsetting continued weakness in exports. In addition, targeted household stimulus measures announced recently will support consumption in 2024. Together these factors are expected to support robust demand for Australian agricultural exports into southeast Asia. The ASEAN-5 accounted for 17% of the value of Australia’s agricultural, fisheries and forestry exports in 2022–23. Vietnam – also an ASEAN member – accounted for an additional 6%.

High interest rates and elevated inflation in Australia are expected to weigh on household consumption and economic growth in 2024. Real GDP growth is expected to average 1.8% over 2023–24, the lowest since 1991–92 excluding the pandemic-affected 2019–20. From May 2022 to November 2023, the Reserve Bank of Australia (RBA) raised the cash rate target by 425 basis points to 4.35% – the highest rate since 2011. Higher interest rates have lowered disposable incomes for mortgage holders and along with high inflation, have reduced total discretionary spending. Monthly consumer price inflation was 4.9% year-on-year in October 2023, and 5.3% for food and non-alcoholic beverages. Ongoing household budget pressures are contributing to softer demand in aggregate, with consumers expected to continue shifting into cheaper agrifood products or those with declining prices such as red meat and vegetables.

Despite challenges to household consumption, aggregate consumption in Australia has been supported by strong population growth from immigration. Population growth is expected to average 1.9% over 2023–24, following the 2.0% expected for 2022–23 – the highest annual average since 2008–09 (Figure 1.3). Strong population growth has supported robust food consumption volumes over the last 2 years (Figure 1.4)

Figure 1.3 Year-ended quarterly Australian population growth

Figure 1.4 Quarterly volume of Australian retail turnover

The Australian dollar is expected to average US65 cents over 2023–24, a 3% depreciation on the average for 2022–23 (Figure 1.5). This depreciation is being driven by:

• Relatively modest commodity demand expectations from China and other key trading partners.
• Heightened global financial and geopolitical instability, with US dollar denominated assets such as US Government bonds perceived as relatively safe compared to Australian dollar denominated assets.

Reducing the magnitude of the depreciation are market expectations for the US Federal Reserve to lower interest rates faster compared to the RBA in 2024. This would typically reduce demand for US dollar denominated assets.

A low Australian dollar over a sustained period increases the cost of imported farm inputs but also increases the price competitiveness of exports contracted in Australian dollars. For the many agricultural exports, such as bulk grains, which are contracted in US dollars, a weaker Australian dollar increases the Australian dollar value of these contracts. The RBA’s Index of Rural Commodity Prices expressed in Australian dollars has averaged 12% higher relative to US dollars in 2023–24 to October (Figure 1.6), the largest positive differential since 2002–03.

Figure 1.5 Quarterly average Australian dollar-US dollar exchange rate

Figure 1.6 Monthly rural commodity price index

High prices for many farm inputs and high production levels are expected to keep input costs elevated for Australian agricultural businesses in 2023–24. Most fuel used by Australian agricultural businesses comes from imported diesel, with Australian regional pump prices averaging over 50% higher to date in 2023–24 compared to the previous 5 years. Global diesel prices have traded higher than crude oil in 2023 as major producers such as Saudi Arabia and Russia have limited supply of medium and heavy crudes suitable for refinement into diesel. In addition, a regional escalation of the Hamas-Israel conflict has the potential to increase oil prices as the Middle East is a major oil producing region.

Prices of Australian fertiliser imports have declined from their peak in 2022 but currently remain around 25% above pre-pandemic averages. Fertiliser costs are expected to fall in 2023–24 but remain relatively elevated (Figure 1.7). Expected higher fertiliser costs are a risk for farmers securing supplies in 2024, with the onset of El Nino conditions likely to result in a cool European winter and higher natural gas prices (a critical input to fertiliser production). Urea fertilisers made from nitrogen are the most common in Australian agriculture, with producers wholly reliant on imports. The Middle East has provided 62% of Australia’s nitrogen fertiliser imports to date in 2023–24, with the potential for geopolitical tensions to constrain future trade. In addition, a weak Australian dollar in 2023–24 has contributed to higher prices for imported fertilisers and fuel.

Finance costs have also increased significantly for Australian businesses over 2023. Debt is an important source of funding for ongoing working capital and new investments for many Australian agricultural businesses. Higher interest rates have increased debt servicing costs, with aggregate farm interest payments forecast to increase from an estimated $1.5 billion in 2021–22 to $6.6 billion in 2023–24 (Figure 1.7).

Labour pressures for Australian agricultural businesses have eased over 2023 with the return of overseas seasonal workers. The number of temporary migrants working in agriculture is now above pre-pandemic levels reflecting the return of seasonal backpackers and continued strength of the Pacific Australia Labour Mobility Scheme. Labour market tightness remains in some industries, such as meat processing. However, Single Touch Payroll data indicate the number of jobs in agriculture declined from April to October 2023, reflecting the seasonal slowdown over winter that existed pre-pandemic. Job advertisements have declined economy wide over 2023 and growth in agricultural labour costs is likely to ease in 2024 as the economy slows and worker demand moderates.

Figure 1.7 Agricultural industry, selected inputs costs