Why 2024 might see you get a pay rise in real terms

Inflation is that houseguest we’re more than ready to say goodbye to. After all, inflation has hit our grocery basket, the petrol bowser, and even meant that, despite wages growth, we are actually earning less in real terms. But what if I was to tell you that 2024 might have some silver linings?

I spoke to Adelaide Timbrell, Senior Economist for ANZ and there’s more to be positive about than you might think after a tough year. It’s not to say that 2024 is guaranteed to be all roses and champagne, but there is cause for cautious optimism. 

The slowdown continues – but get ready for 2025

Lately, there’s been much to say about the slowing Australian economy. Timbrell expects that trend to continue into the new year and a continuation of higher rates, meaning that household consumption doesn’t grow much.

There has been some cooling in the labour market and Timbrell has seen higher medium-term unemployment – that is, where people may be out of the workforce for longer than just a few weeks. Some other signals on this front have been higher hours-based underutilisation, higher youth unemployment and fewer job ads.

“I think we’re going to see more unemployment than we’ve seen this year, but we expect the peak unemployment rate to be in the mid-fours. At the end of 2019, it was 5.2% so that’s actually a resilient outcome for the labour market,” Timbrell says.

Maintaining reasonable employment numbers when there is potential for a recession and high inflation is obviously a critical point – for the most part, it’s a matter of survival. That said, Timbrell notes we will not have a technical recession.

“Population growth is really going to keep GDP numbers afloat,” she says.

But it’s not all bad news and we should see the cycle start to turn in late 2024.

“Once 2025 hits, we think there will be a re-acceleration of growth as we get closer to the 2-3% inflation band and as the economy generally stabilises.”

And then, on a more positive note, there’s the matter of wages.

While wages growth was strong in 2023, the inflation rate was stronger.

“Many people’s wages went backwards even if they had a pay rise, because it wasn’t enough to offset all those price increases,” says Timbrell.

In 2024, this trend should be reversed.

“Wages growth is going to be higher through the whole year compared to inflation. If you take a whole year together, we’ll actually be making more and there should be more room in the household budget,” says Timbrell.

As an added bonus, she also tips the end of 2024 to be when we might see the first rate cut – but with a caveat.

“We don’t think there’ll be many cuts and they won’t be happening thick and fast. In previous cycles, we’ve hiked a little bit and cut a lot, but this time, we hiked a lot then cut a little. We needed to get to more normal levels,” she says.

Could Black Friday mean back in the black?

Those watching the Black Friday sales may wonder what it all means – are we seeing the return of the consumer discretionary sector? Will inflation suddenly jump up after its gradual downward trend?

The simple answer is 'no' – and it’s down to a couple of reasons.

Firstly, Timbrell points to ANZ’s observed spending data.

“What we saw is that the uplift in spending, which generally happens towards the end of the year, happened earlier than usual. There was early momentum – but discounting started earlier than usual,” says Timbrell.

She doesn’t expect the uplift to continue into the end of the year.

“It’s likely to be a shift earlier of that typical uplift in spending rather than an elongation of a high spending period for households because households are still facing higher mortgage repayments, other cost of living pressures on the bare essentials and that affects every single person in the economy,” she says.

In fact, Black Friday may even be a positive for inflation.

“The earlier and elongated discounting may reduce the inflation for the quarter, because the more sales you have, the lower the prices are and that indicates deflation,” she says.

However, Timbrell notes a common retail trick is to increase prices in September and October to allow for “bigger” discounts in November and December. It’s also important to bear in mind that consumer discretionary spend is less critical to the inflation print compared to petrol prices, groceries and utilities.

Readers might also recall the concept of the lipstick effect – that is where consumers switch to smaller more affordable luxuries in challenging times.

Timbrell is seeing some evidence that very small luxuries are doing better than larger ones.

“When you look at the very small luxuries, a little bit of takeaway food, maybe some chocolate, these sectors anecdotally tend to be a bit more ‘economic-downturn’ proof and cost-of-living proof,” she says.

The sector winners and losers in 2024

On the whole, consumer discretionary spending, once inflation is accounted for, has fallen in the last year. Timbrell suggests Black Friday hasn’t reversed the trend. She tips little or no growth on this front, particularly because this is the area that consumers can delay when they are feeling the pinch.

Another area continuing to feel the pinch is the office sector, due to persistent interest in and demand for hybrid and work-from-home options – but Timbrell notes there is variation here. Good quality assets are less sensitive to this challenge.

On the flip side though, travel and tourism could have a good year coming – and it’s thanks to the Australian dollar.

“The Australian dollar is likely to stay under 70 cents for much of the next six months. We think it will be in the early 70s by the end of next year and that’s something that will help encourage international tourists in, but discourage Australian residents from leaving,” Timbrell says.

Some other sectors that look promising include infrastructure – particularly the public sector which will be propped up by a number of transport projects underway.

Industrial property is also likely to do well because there’s little supply coming online.

While agriculture is weather-dependent, Timbrell argues that there’s an enormous amount of demand coming from China and broader Asia which means this sector could be less impacted by a slowing economy.

The most unusual things to note about the market today

If you think back to the heights of the covid pandemic in 2020 and 2021, what should have been predictable has been far from the case. For example, as soon as rates started hiking, you might have expected spending to fall off a cliff and the same with employment. It doesn’t seem unreasonable to suggest the RBA itself has been caught by surprise that its efforts haven’t worked faster.

“The most unusual thing is how much spending the economy still has in it. How much people are still spending. They are spending less than they were last year, but it hasn’t fallen off a cliff,” says Timbrell.

The second thing she points to is the resilience of the labour market.

“That incredible labour market resilience is something that has been a real comfort to the economy – even though it doesn’t help everyone, a tight labour market means better prospects for getting or keeping a job, and keeping up with household expenses,” she says.

It’s something to keep in mind, and remember that cycles come and go. While 2024 might not be a year of great highs, it may just be a year of consolidation to get us rolling again in 2025.