Economic overview

Global economic growth is expected to slow over the remainder of 2023. Ongoing high inflation, higher global interest rates and tighter financial conditions are expected to weigh on investment and consumption. Global Gross Domestic Product (GDP) growth is expected to average 2.7% in 2023 before increasing to 2.9% in 2024, still well below the 10-year pre-pandemic average growth rate of 3.7%. Global economic growth in 2024 is expected to be supported by higher household spending, as global inflation eases, and interest rates fall.

Global GDP growth in 2023 is expected to be 0.2 percentage points weaker than expected in the March Agricultural Commodities report. This reflects ongoing interest rate rises in many advanced economies since March 2023 and heightened vulnerability in parts of the global financial sector.

GDP growth in advanced economies is expected to slow to 1.1% in 2023, down from 2.6% in 2022, and remain relatively low at 1.2% in 2024. GDP growth in emerging and developing economies is expected to decline slightly to 3.8% in 2023 before increasing to 4.0% in 2024.

The global economic outlook remains highly uncertain with risks tilted to the downside. The transmission of rapid global interest rate rises has yet to fully impact global economic activity – household consumption may fall further than expected. Central banks have had to balance monetary policy tightening with the risk of recession, especially in advanced economies. Household consumption to date has been resilient supported by low unemployment and high savings accumulated during the pandemic. However, household disposable incomes are expected to fall in 2023 across most advanced economies which will weigh on consumption growth. Lower consumption could in turn lower demand for emerging and developing economy exports and weigh on economic growth globally.

Recent bank collapses overseas have also led to heightened investor risk sentiment and tighter financial conditions, particularly in the United States. The US Federal Reserve raised the federal funds rate by 500 basis points from March 2022 to May 2023, to a target range of 5.0–5.25% – the highest level since 2007. A further tightening of global financial conditions or heightened geopolitical tensions could lead to declines in global activity, lower consumer and business confidence, lower household spending, and reduced investment. Falling consumer confidence tends to see lower expenditure on non-staple agricultural products such as meat, dairy, horticulture, sugar, and cotton.

Global economic headwinds and increased cost of living have also impacted Australia. Economic growth is expected to slow significantly in 2023–24 as inflation and higher interest rates weigh on household disposable incomes and consumption. Real GDP is expected to grow by 3.3% in 2022–23 before falling to 1.4% in 2023–24, well below the 10-year pre-pandemic average of 2.6%.

Domestic consumption over 2022–23 has remained relatively steady mainly due to savings buffers developed over the pandemic and a lag in full monetary policy transmission. However, household saving rates are now below pre-pandemic levels due to the impact of higher inflation and interest rates on household budgets. From May 2022 to May 2023, the Reserve Bank of Australia (RBA) raised the cash rate target by 375 basis points to 3.85% – the highest rate since 2012. Futures markets expect the rate to remain above 3.5% until the end of the 2023–24 fiscal year. These factors, coupled with RBA research indicating around 880,000 low rate fixed mortgages are set to expire over 2023, are expected to weigh on disposable income and consumer spending in 2023–24.

Despite increasing inflation, household spending on food is relatively inelastic. Annual food inflation in the March quarter 2023 was 8.0%, higher than headline inflation of 7.0%. Over the March quarter, the volume of retail trade declined, but spending on food remained steady (Figure 1.1). However, falling household disposable incomes is likely to change food spending, with consumers expected to shift into cheaper agrifood products. RBA analysis indicates that this shift in consumer demand is more noticeable in geographic areas that have below-average income. It found that consumers in these areas were likely to change to cheaper products or reduce the number of purchased items. The extent to which higher inflation and interest rates reduce aggregate consumption of agrifood products will depend on how much households draw on savings and the rate of population growth.

Figure 1.1 Australian retail turnover, chain volume measures

Australia’s inflation rate is expected to average 7.0% in 2022–23, falling to 4.3% in 2023–24 as higher interest rates weigh on consumer demand and easing supply-side pressures reduce food and energy prices. However, at 4.3%, inflation still remains significantly above the RBA’s target band of 2–3% and the 10-year pre-pandemic average of 2.1%.

China’s economy is expected to recover over 2023 following the lifting of pandemic restrictions in December 2022. GDP growth is expected to be 5.4% in 2023 before moderating to 4.5% in 2024, a significant rebound on the 3.0% growth in 2022 (Figure 1.2). China’s economic recovery in 2023 has been fuelled by improved mobility in supply chains and greater consumer spending with the release of pent-up demand in the services sector, such as for restaurants and travel.

A positive outlook for Chinese demand is expected to support Australia’s agricultural exports in 2023–24. China is Australia’s most valuable agricultural export destination, accounting for 18% of the value of agricultural exports in 2021–22 and 25% on average over the last 5 years (Figure 1.3). In 2024, China’s economic growth is expected to moderate as softening global demand weighs on exports and continued weakness in the property sector is expected to depress economic activity.

Figure 1.2 Real GDP growth, selected economies	Figure 1.3 Share of Australian agricultural export values, selected economies

Economic growth in southeast Asia is expected to be relatively resilient in 2023 and 2024 with strong domestic consumption more than offsetting lower exports. Subdued global trade and commerce has weighed on economic activity in export-focused countries such as Singapore and Thailand. In addition, it remains uncertain whether expected lower economic activity in advanced economies and associated trade will be offset by improved economic growth in China. Expected interest rate cuts in Indonesia and the Philippines in 2023–24 will improve household budgets and support consumption growth. The ASEAN-5 (Indonesia, Philippines, Malaysia, Singapore, Thailand) accounted for 15% of the value of Australia’s agricultural exports in 2021–22. Vietnam – also an ASEAN member – accounted for an additional 5%.

On a per-person basis, real incomes in the ASEAN-5 are expected to be 7% higher in 2024 than they were in 2022, driven by a strong outlook for economic growth. Recent ABARES research into long-term agrifood demand in Asia shows that as consumers become wealthier they demand more food products in aggregate and change their consumption preferences to higher value products. This is expected to support growth in the value of Australian exports to the region over the medium term.

Japan’s economic growth is expected to be around trend in 2023 and 2024 as higher consumer spending offsets lower exports. Japan accounted for 10% of the value of Australia’s agricultural exports on average over the five years to 2021–22. Rising household consumption over the outlook is expected to support economic growth and demand for Australian agricultural exports in 2023–24, somewhat offset by lower export growth, investment, and business confidence.

In South Korea, high inflation, high interest rates and weak export growth have weighed on economic activity in the first half of 2023. In 2023–24, inflation is expected to ease significantly in response to higher interest rates in 2022–23; combined with expected interest rate cuts, this should lift household consumption and economic growth. South Korea accounted for 5% of the value of Australia’s agricultural exports on average over the five years to 2021–22.

The Australian dollar is expected to average US67 cents over 2022–23 before appreciating to US70 cents in 2023–24 driven by improved global economic sentiment as inflation subsides. The US dollar, perceived as a less risky financial asset, typically weakens when global growth prospects improve with investors preferring equities and other higher-yielding investments. Futures markets are expecting the US Federal Reserve to begin cutting interest rates in 2023–24. This will reduce the differential between US and Australian interest rates, supporting greater capital inflows into Australia and demand for Australian dollars.

Despite depreciating against the US dollar in 2022–23, the Australian dollar has been supported by strong commodity export growth. Australia’s trade balance increased in March 2023, despite lower global commodity prices, as a decline in import volumes outweighed lower exports. The outlook for Australia’s terms of trade and its effect on the Australian dollar in 2023–24 remains uncertain, dependent on economic momentum in China’s manufacturing and real estate sectors.

Since the 2021–22 fiscal year, the Australian dollar has generally been weaker against the US dollar relative to the Euro, Brazilian real and New Zealand dollar (Figure 1.4). As with most of our major agricultural export competitors, the majority of Australian agricultural export contracts are denominated in US dollars – around 68% in 2020–21 – with variation by commodity.

In the short term, a weaker Australian dollar can be good for Australian exporters as it increases the Australian dollar value of agricultural exports contracted in US dollars. However, a lower Australian dollar also increases the cost of imported inputs such as fuel and fertiliser. A comparatively lower Australian dollar over a sustained period increases the competitiveness in international markets of Australia's agricultural exports contracted in Australian dollars.

Figure 1.4 Relative weekly exchange rates against the United States dollar

High prices, particularly for fertiliser and energy, have increased the cost of farming for Australian businesses since mid-2021. Prices for energy commodities such as natural gas and oil rose markedly when Russia invaded Ukraine because of heightened global uncertainty regarding Russian supply. Crude oil prices have declined since mid-2022 mainly due to a worsening global economic outlook. However, prices for diesel in Australia – a critical input to agricultural production accounting for around 8% of aggregate farm expenditure – remain higher than they were at the start of 2020.

Fertiliser is a critical input for Australian agricultural production – ABARES data show that together with chemicals, fertiliser accounted for 14% of aggregate Australian farm expenditure in 2021–22. Buoyed by elevated global uncertainty and high fertiliser manufacturing costs such as for natural gas, fertiliser prices increased drastically from their pre-pandemic average, climbing 260% to their peak in April 2022 (Figure 1.5). Fertiliser prices have declined over 2022–23 reflecting increased global production, easing of export controls and lower natural gas prices. However, in April 2023 fertiliser prices remained around 90% higher than their pre-pandemic average. In 2023–24, colder weather in the northern hemisphere and a stronger-than-expected rebound in Asian demand are risks that may put upward pressure on prices.

Figure 1.5 Average monthly global commodity prices

After sustained increases during the pandemic, container freight shipping prices have eased. Spot prices on major global shipping routes were around 54% lower in March 2023 compared to the peak in June 2022 (Figure 1.6). Declining freight prices reflect low shipping demand due to inventory restocking from importing businesses, lower global economic growth, and the stabilisation of supply chains. Data from the International Grains Council also show that freight prices for bulk grain shipments from Australia normalised in late-2022 to be consistent with rates from other major exporters.

However, container freight prices from Australasia and Oceania to the Far East – the route covering most of Australia’s agricultural exports – remained relatively elevated in March 2023. Apart from grains, the majority of Australian agricultural exports are shipped in containers. High freight rates for Australian shipping routes relative to other regions decreases the competitiveness of Australian agricultural products in international markets. If sustained into 2023–24, this may moderate demand for Australian agricultural exports in some Asian markets.

Figure 1.6 Average monthly container freight spot prices

Labour is another key input into Australian agriculture that has been limited during the pandemic period. Extremely low overseas migration and increased competition for Australian resident workers reduced the number of workers in the agricultural sector and increased costs per worker for employers in 2021–22. In addition, housing shortages have weighed on filling agricultural job vacancies in regional areas; ABS data show rental rates in regional areas have increased more than in urban areas over the last four years, in part due to limited housing availability. Since the normalisation of migration in mid-2022, total advertised job vacancies have stabilised, however, vacancies remain elevated in agriculture (Figure 1.7).

Labour supply in the agricultural sector is expected to improve in 2023–24. Rising overseas migration to Australia and continued growth in the Pacific Australia Labour Mobility (PALM) scheme will benefit the horticulture and meat processing sectors in particular. However, with Australia’s unemployment rate still historically low in April 2023, it will take time for growth in wage costs to subside. In addition, broader measures of labour cost growth may remain high as employers continue to use bonus payments to retain or attract skilled workers.

Figure 1.7 Monthly Australian internet job vacancies