OE Logo
Request a trial

Maximilian

Ever since the onset of advanced economies’ campaign of interest rate hikes in December 2021 there has been a lively debate about the impact and efficacy of tighter monetary policy in terms of reducing inflation and slowing growth. While inflation has indeed fallen across the world, the relative economic resilience in the United States in particular, which has raised interest rates significantly more than the eurozone, has raised questions about if and how much interest rates are actually depressing activity.

skyscraper construction

Global construction activity is now forecast to fall 1.6% in 2023 and rebound 0.5% in 2024 to $9.6tn. China’s real estate downturn continues to dominate the global outlook. We now expect a slower recovery in both residential and non-residential building activity – and anticipate a more muted recovery in Chinese GDP over the medium term.

Global GDP growth and inflation will slow in 2024 and central banks will begin to pivot in H2 – at least that seems to be the broad agreement among markets, policymakers, and forecasters. For the most part, we concur and have identified three key themes that will be key to the precise path that economies and financial markets take next year.

The office sector in Australia is facing several headwinds, including reduced demand from hybrid working arrangements, slowing economic and employment growth, and rising bond rates and yields. However, it may still present an attractive cyclical investment opportunity with astute timing and management of vacancy and incentive risks.

The fight against inflation is well underway across the globe, with most central banks either approaching or having already reached the peak of their hiking cycle. Additionally, geo-political
tensions and the possibility of increasing restrictions on trade between global rivals remains a key downside risk to the global outlook.

There remains action on the policy front that has the potential to swing the medium to long-term outlook. In the lead-up to the 2023/24 Budget, the Federal Government released its Migration System Final Report.

We have revised up our forecast for long-term bond yields in several advanced economies – most notably in the US where yields have been lifted by 50 basis points in our forecasts.

Global passenger vehicle production was heavily impacted by the pandemic. Major manufacturers’ forecasts for demand were lowered substantially at the onset of the pandemic, while supply chain disruptions continued to force manufacturers to scale back production.

The shift to flexible ways of working and using office space was already underway prior to the pandemic with the advent of open plan offices, activity-based working, hot desking and co-working space.

The major CBD Australian office markets are oversupplied, with double-digit vacancy rates that should be suppressing rental growth. However, historically high incentives are boosting the financial appeal for tenants to move into better quality space when their leases expire, even as stated rents rise in many locations.

The Australian economy is slowing, with tight monetary policy and falling real incomes curbing demand and earlier supply constraints still affecting the realisation of investment projects.

Recession risk has become a hot topic in Australia with GDP growth slowing to just 0.2% q/q in Q1, and a sharp interest rate hiking cycle putting the clamps on growth in a bid to curb inflation.

Oxford Economics Australia was engaged by the Construction, Forestry, Maritime, Mining And Energy Union (CFMEU) to explore the economic case for investing in Australia’s social and affordable housing, potentially funded by revenue from a super profit tax. 

Related Services Australia Macro Service Defunct In-depth insights and analysis of key domestic and global trends, enabling clients to make better strategic decisions, manage risks and take advantage of newly-developing opportunities in a fast-changing economic environment. Find Out More → Global Macro Strategy Service Global insight and opportunity at your fingertips. Find Out More →

Australia’s rental market tightened considerably in 2022 with rents growing 13.4% y/y nationally. Momentum has continued in 2023, with an increased volume of tenants competing for a relatively static level of supply, contributing to historically low vacancy rates. Moreover, higher interest rates have significantly lifted the mortgage costs for landlords, who are keen to balance their cash flow through higher rental incomings.

The recent blame put on rising company profits as a key driver of consumer price inflation in Australia is overstated. We are not wholly convinced by claims of a causal relationship between profits and inflation as has been widely reported.

The pipeline of build-to-rent (BTR) developments across Australia continues to swell, with our project tracking currently capturing a pipeline of circa 45,000 announced units. Around 5,900 units have broken ground in FY2023, with a further 15,000 geared to commence across FY2024 and FY2025.

The RBA has raised its cash rate target by a further 25 basis points, taking it to 4.1%. Although inflation has peaked, the RBA board is still clearly uncomfortable with its brisk pace.

We believe the most significant policy measures to come through in the budget for residential building are the announced tax tweaks for build-to-rent (BTR) development.

We believe the most significant policy measures to come through in the budget for residential building are the announced tax tweaks for build-to-rent (BTR) development.

Also of Interest