Economic Bulletin
Economic Bulletin: February 2024 | Analysis
28 February 2024
The start of 2024 has presented significant challenges for the fast-moving consumer goods (FMCG) sector. On the economic front, inflation is showing signs of deceleration, as indicated by the latest report from the Australian Bureau of Statistics’ (ABS) for the December quarter. The report shows a 4.1 per cent year-on year (YOY) price increase, down from the 5.4 per cent reported in the September quarter. While this figure falls below the expected CPI, inflation levels remain high. This is placing significant strain on Australian households, as cost-of-living pressures impact family finances, fostering a sense of pessimism among consumers.
In the February Statement on Monetary Policy, the Reserve Bank of Australia (RBA) noted that high-interest rates are effectively moderating demand in the economy to align with its capacity to supply goods and services. While the RBA acknowledges that high-interest rates, along with high inflation, are weighing on household disposable incomes, the central bank emphasised that tight monetary policy is the best policy lever for restoring inflation to its target range. Consequently, the RBA opted to maintain the cash rate target at 4.35 per cent in February, with expectations that inflation will return to the 2-3 per cent target range by 2025.
With monetary policy set to remain unchanged, at least in the short term, the government is facing increasing pressure from media and the public to support Australians doing it tough. In particular, within the FMCG sector, there have been numerous allegations of retailers engaging in “price gouging”, taking advantage of consumers during difficult times. This has prompted federal and state parliamentary inquiries, and an Australian Competition and Consumer Commission (ACCC) probe into supermarket pricing.
On the input cost front, ABS data suggests that some of the pressure in food input prices has started to recede as overall international food commodity prices have declined since their peak in March 2022. However, attacks in the Red Sea have resulted in an International Ocean Freight Shipping price hike with major shipping lines rerouting vessels via a longer route around the Cape of Good Hope. This has resulted in increased costs and delays. When it comes to energy, despite a decrease in international gas prices over the past year, Australian companies experienced a notable 27.1% year-on-year (YOY) increase in the December quarter, as reported by the ABS. Businesses in the FMCG sector will have to take a strategic approach for mitigating the impact of these geopolitical disruptions to ensure competitive pricing and supply chain resilience.
Looking ahead, the latest Global Economic Prospects report from the World Bank suggests that while certain emerging markets and developing economies – Australia included – may experience some growth, the overall outlook remains subdued. Global growth is expected to slow to 2.4 per cent in 2024. The World Bank advised that further escalation of the conflict in the Middle East could led to a surge in energy and food prices, pushing up inflation in all regions. Additional global risks with potential implications for Australia’s economy, and consequently the FMCG sector, include further geopolitical and trade tensions, the potential for slower growth in China, leading to subsequent decrease in international demand, tighter-than-expected financial conditions, and climate-change-related natural disasters.
In light of these economic dynamics, the sector’s outlook hinges on its ability to adjust to these ever-changing factors. Strategic pricing, resilient supply chains, and innovative approaches centered around consumer needs will prove essential for companies to thrive in an environment marked by inflation, geopolitical uncertainties, and grim consumer sentiment.
