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2024 has been — economically — a year where people have enjoyed vastly differing fortunes.
The impact of interest rates has shaped the year, says independent economist Nicki Hutley.
Generally it's whacked younger people with mortgages as well as renters, while boosting the assets and wealth of typically older people who've paid off their housing.
How was 2024? It depends on who you are, says independent economist Nicki Hutley. (ABC News: John Gunn)
"Absolutely. Very uneven across different types of households."
Monetary policy is a blunt instrument, she notes, with the impact largely split by age.
"Younger households with mortgages, they've got the largest mortgages, they've got higher interest rates. So they are doing it particularly tough," she says.
"We know that some renters on low incomes are doing it exceptionally tough."
At the same time, high interest rates have bumped up superannuation returns and the value of bank deposits.
"We've seen a boomer spending spree in things like tourism and recreation."
The particular circumstances are narrowing the group who benefit, says UBS Australia chief economist George Tharenou, and expanding the cohort missing out.
"This dynamic in the Australian economy of higher interest rates, but still high household wealth, and also fast population growth, has led to what we've called a 'winner-takes-all' economy.
"We're seeing a concentration of economic activity and wealth gains in a smaller portion of households and businesses than in prior cycles."
But it's more than just housing and rates.
Donald Trump and Xi Jinping — pictured here in 2017 — will shape the economic year ahead for Australia. (Reuters: Damir Sagolj)
There's also inflation, the sluggish economy of our major trading partner China, and looming over it all, the second term of US president-elect Donald Trump.
ABC News has spoken to prominent economists, whose thoughts influence billions of dollars in assets.
They all agree — there's been a big divergence in how the year has felt, depending on your position in life.
Interest rates on hold, for now
In November 2023, the Reserve Bank of Australia (RBA) lifted its cash rate to 4.35 per cent — and it hasn't moved since.
"There's been a little bit of flip-flopping," Ms Hutley says, about public pronouncements on the direction of interest rates.
The central bank has lifted them with the aim of getting inflation in a "target band" of between 2 to 3 per cent a year.
"But they've certainly, more recently, been quite concerned about the potential for inflation to lift again, before it's got safely back into the band."
Which means rates are staying put for now.
Depending on your age, income and assets, the impact of those interest rates has been a sledgehammer or a trampoline for living standards.
Jonathan Kearns, chief economist of investment manger Challenger, says strong employment has held things together in 2024. (ABC News: John Gunn)
Jonathan Kearns, the chief economist of investment manager Challenger, says simple numbers mean households who took out large mortgages at the bottom of the interest rate cycle have been struggling with soaring repayments.
"They haven't had real wage increases for a number of years, the interest payments have been going up, they've suffered very high inflation — for those households, it's been a really tough year."
The full picture is more complex, because our interest rates aren't particularly high compared to the past, or to other countries.
High inflation has eroded the purchasing power of everyone, which is why the RBA has lifted interest rates to try to take "heat" out of the economy.
But high asset prices mean people with wealth are enjoying a great patch, with stock markets at record levels and house values largely holding up.
"Monetary policy just hasn't been that tight, and we can see that in the fact that borrowing for housing has continued to pick up … and is getting stronger," Dr Kearns says.
"In Brisbane, Adelaide, Perth, you're seeing price growth of 15 to 25 per cent … that's not a normal situation if we supposedly had tight monetary policy."
RBA governor Michele Bullock has been consistent in her concerns about the menace of high inflation. (AAP: Bianca De Marchi)
Countries like the US and UK have started cutting rates, but they're still higher than the 4.35 per cent our central bank has set.
New Zealand's was at 5.25 per cent for more than a year until August 2024 and it's just gone under ours, to 4.25 per cent.
Most economists, banks and analysts are banking on RBA rate cuts beginning in mid-2025.
"Monetary policy in Australia is still not that restrictive, and so we can probably only get about three cuts before monetary policy is around about its neutral level," Dr Kearns cautions.
Inflation eases, set to continue
The monthly and quarterly inflation numbers have come to dominate our news, political and economic cycles.
The latest "read" had prices rising at 2.1 per cent annually, the lowest pace of growth since inflation took off in mid-2021.
"In 2024 we learned that inflation globally was not 'sticky' for the long term," says AMP deputy chief economist Diana Mousina.
AMP deputy chief economist Diana Mousina noted a big divergence in economic outcomes across the states. (ABC News: John Gunn)
There was concern that after the COVID pandemic, changes to inflation rates were structural, potentially permanent.
"What we've seen is that inflation has actually come down in an orderly fashion, and it's come down without creating a big downturn or recession."
The concern was we'd need to see a "big collapse in growth", and that hasn't happened.
Inflation will continue to ease off the back of higher interest rates, says Dr Kearns.
"Aggregate (overall) demand in the economy has exceeded supply, and so that's why inflation is still above the RBA target," he adds.
Supply chain issues and shortages may have eased, but we don't have enough workers, so the cost of services is still high.
"Services inflation is still high, reflecting that the labour market is still tight."
The "trimmed mean" measure of inflation that the RBA most closely watches when it sets interest rates rose in October to 3.5 per cent annually.
It excludes volatile items, such as the the large downward impact of falling fuel prices and electricity subsidies that brought down power bills.
Ms Hutley thinks even this measure will slide down below 3 per cent a year.
"Since 2021, inflation has risen by 17 per cent across the board, whereas wages have only risen by 13 per cent.
"So whilst households will be in a better position … things are tough for households, and will be for a while, until we see those wages go much faster than inflation."
Mr Tharenou says the most likely path of inflation is to see the slide maintained.
George Tharenou, UBS chief economist in Australia and NZ, says 2024 has led to a "winner-takes-all" economy. (ABC News: John Gunn)
"It's going to continue to moderate in underlying or trimmed mean terms, as the labour market continues to be relatively resilient," he says, pointing to the likely extension of federal government subsidies that have reduced power bills.
Unemployment tipped to rise, wage growth to slow
How we work, and get paid for it, has been one of the surprises of the year.
The unemployment rate started the year at 4.1 per cent and ended it slightly lower at 3.9 per cent.
The consensus had been that the economic crunch on inflation and interest rates would boot workers into unemployment — so no-one saw this strength coming, including our experts:
- Hutley: "I have to confess, I was definitely taken by surprise at the strength in the labour market. I was expecting (unemployment) to be at least 4.5 per cent."
- Kearns: "I don't think anyone expected it to do quite as well as it did."
- Mousina: "The strength in the labour market has definitely been one of the biggest upside surprises to our forecasts in 2024."
- Tharenou: "Surprisingly resilient and better than expected by almost anyone's expectations a year ago"
AMP's Ms Mousina sees the result being linked to labour shortages in key areas.
"Businesses have basically been hoarding … holding onto as many workers as possible, maybe not hiring as many people, but also not firing lots of people."
There are gaps. Ms Hutley calls public sector employment "ridiculously strong" with state and federal infrastructure projects playing a role in maintaining a scarce market and competition for workers.
State governments have been building large infrastructure projects. That's contributed to more competition for skilled labour. (Supplied: Infrastructure Victoria)
Mr Tharenou agrees, "the magnitude of very strong government spending and direct government employment has supported the labour market in a way we haven't seen in prior cycles."
Dr Kearns calls it "remarkable", but warns the RBA wants to see a tighter labour market — meaning more people unemployed — before it will cut rates.
"We've actually seen wages growth coming off, and so I think that's going to give the Reserve Bank a little bit more confidence," he says.
The wage price index, that measures changes in the price of labour, was growing at 4.3 per cent annually coming into 2024 — heights it hadn't reached in 15 years.
Even with the most recent quarterly figures in September showing wages growing a 3.5 per cent annually.
Because wages didn't rise as quickly or as high as inflation, people have seen their living standards and purchasing power — what they can do with their money — retreat over the past two years.
"In the long run, if wages growth is running at 3 per cent, that's a pretty sustainable level for (not boosting) inflation," says Ms Mousina.
"We really need to see productivity growth lift in the next few years, to get unit labour cost growth to become a bit more sustainable."
No quick fixes for China's sluggish economy
The economy of our largest trading partner, China, has struggled all year.
In one week, 40 banks were absorbed by larger rivals.
Consumers have pulled back spending and stimulus packages that were meant to have the effect of a rocket, felt more like a paper plane.
"Quite weak," is Mr Tharenou's assessment.
"Very complicated and quite messy," says Ms Mousina.
"Significant problems" is Dr Kearns's summary.
"Their property sector is essentially in free fall, with housing prices falling and the value of sales falling," he says, pointing out that property accounts for about a quarter of the Chinese economy.
"It's reducing the incomes of local governments and therefore how much they can spend. It is permeating through the economy."
But it's not all bad, Ms Mousina counters, "export growth, industrial production, some parts of fixed asset investment, those areas of the economy have actually excelled quite a lot in 2024."
But we've seen the impact of the economic pressure in softening prices for the commodities we sell to China.
"That's going to affect the federal budget outline," Ms Hutley says.
"But China is still growing strongly by 'Western, developed economy standards', at around 4.5 to 5 per cent annually, so that's keeping momentum going."
Mr Tharenou is less positive.
"The likelihood is that their growth rate was slow even more sharply in 2025/26," he says.
"Perhaps it's something we haven't seen before, like a 3 per cent growth rate."
What happens will have a lot to do with the latest occupant of the White House, who takes office in January.
Trump takes office, again, threatening trade wars
President-elect Trump has already enjoyed one term, so economically we know what to expect — that we won't know until it happens.
"The main thing we can anticipate out of President Trump is a degree of volatility," says Dr Kearns.
The Inflation Reduction Act from President Joe Biden poured hundreds of billions of dollars worth of investments, incentives and tax breaks into the US economy. That program may be wound back.
But the likely biggest impact will be from tariffs imposed on goods from foreign countries.
Already, he's threatened to slap a 25 per cent impost on neighbours Mexico and Canada, and additional taxes on Chinese goods.
"Australia is deeply affected by what happens to China," Ms Hutley reminds us, with modelling showing US tariffs on China and the rest of the world would quickly impact our local growth.
"We have to see whether the action matches the rhetoric, but certainly that would be bad for growth … it's not necessarily going to be a good outlook for the US if those core policies are put in place, but we have to wait and see."
Dr Kearns agrees many of Trump's campaign pledges, such as mass deportations of migrant workers, would end up having a swift negative impact on the US economy.
He sees Trump being a stimulus to the US economy in the short term, "but I think it's less clear that it's actually beneficial for the US in the longer term".
Mr Tharenou agrees, saying UBS expects Trump's policies to push up US inflation, "perhaps around one-quarter of 1 per cent by the end of this year, and then an ongoing impulse into 2026," and potentially more if they're rolled out quickly.
Ms Mousina doesn't think the incoming US president will be able to implement the high tariffs he's promised, but still expects to see China targeted by "hawkish" elements of the administration.
"We might not be hit as bad because we do run a trade deficit with the US, which means that we export more than what we import to them."
2025 beckons, but what will it bring?
In the new year, we''ll publish a more comprehensive look at what our experts are predicting for 2025.
For now, most are expecting little respite from interest rates, slowly rising unemployment and ongoing international geopolitical instability.
Ms Hutley thinks the "unevenness" of the economy will continue.
"This patchwork economy, whether it's by state, whether it's by sector, we certainly see very different performances," she says.
Ms Mousina thinks global conflict could calm, which could boost equities markets and investment after the shock and turmoil caused by conflict in the Middle East and Ukraine.
"I think it could be a bit of a quieter geopolitical year," she hopes.
2025 will bring a federal election, a new Trump presidency as well as surprises and shocks we can't foresee as we focus on inflation and interest rates.
"I think it's going to be a slow grind out of the situation that we're in," Dr Kearns warns.