Australian Economy forecast for 2022/2023

After the Covid-19 pandemic, countries all over the world are trying to revive their economy and fill the financial void it has left. Many countries are already on track and doing well. Australia performed strongly in the fourth quarter of 2021, beating most predictions that it would not perform well.

Australia also faced the consequences of the pandemic, but they were mild compared to other countries. After the drop of 2.5% in 2020, Australia’s GDP projected 4% growth in 2021 and is expected to grow at 3.3% in 2022. Even though Australia lost its most important trade partner China, Australia successfully managed to fill its place with other nations.

Historical Events In Australia’s Economy

The pandemic has shaken Australia’s economy more than any other calamity in its history. A country with more than 40 percent of its GDP dependent on trade was put to the test. Yet, Australia did exceptionally well by showing positive economic growth in the last quarter of 2021.

With the lockdown announcement in March 2020, Australia’s economy fell 0.3% in the March quarter. This resulted in 66% of businesses reporting a reduction in turnover, 64% of companies reporting a decrease in demand, and 48% of companies reporting impacts on their operations due to the restriction put in place to fight the Coronavirus.

In May-June 2020, Australia imposed even stricter social distancing measurements, resulting in less income reporting by over 72% of businesses, while only 7% reported increased revenue. As a result, in early June 2020, Australia’s GDP fell by a record 7%, dropping for the second quarter in a row. During this period, 2 out of 3 businesses reported decreased revenue. Among these, the most impacted industries were education, accommodation and food, and information media and telecommunication, each reporting 87%, 84%, and 80% decreased revenue, respectively.

In July and August, unemployment in Australia peaked at over 7.5%, which was the highest in over 20 years. During this time, the industries most likely to experience difficulty were accommodation and food, transport and warehousing, and arts & recreation services.

After the decrease in March 2020, Australia’s economy started to recover around September 2020 with the announcement that vaccines would be available in November. In October 2020, businesses began to show signs of recovery. And in December 2020, Australia’s economy was on the upswing, with GDP rising by 3.1%. With the start of 2021, things started to continue improving, with employment recovering to almost 93%.

The real change in Australia’s economy was visible from January 2021, when almost 93% of the job losses due to the pandemic were restored to the pre-Covid level. Aside from the pandemic’s strictly financial characteristics, many experts compared this crisis to other recessions like 2008 and the Great Depression of the 1930s.

In the December 2021 quarter, Australia’s Growth Domestic Product was reported to have increased by 3.4% compared to the September quarter. As the pandemic restrictions started easing up, states like New South Wales (6.7%), Victoria (3.7%), and the Australian Capital Territory (1.9%) showed the most substantial growth even though they were the most affected by the Delta wave restrictions.

The strengths of the Australian economy

Throughout the pandemic, Australia proved to be a resilient economy performing better than other countries. In addition, the Australian government’s cautious approach to the Covid outbreak turned out to be beneficial to the country’s economy.

Below are some of the things Australia did to contribute to its resilience:

As a part of the $100 billion bond purchase program, the Reserve Bank announced that it would purchase bonds that the Australian Government had issued. The Reserve Bank continued to do so until February 2022. This helped to lower the whole structure of interest rates and support Australia’s economy through a standard transmission mechanism of monetary policy.

Australia suffered a sharp drop in visitors (especially short-term visitors like tourists and international students) following the closure of international borders. From April to September 2020, there were approximately 4.1 million fewer short-term visitor arrivals than during the same period the previous year.

Global goods trade fell by a historically high 18.5% in the first half of 2020. Despite the 11% drop in Australian export volumes, the fall in import volumes was much more significant due to weak domestic demand, as revealed in the National Accounts of the June quarter. As a result, GDP growth for the June quarter was 2.5% points higher due to net exports.

The Reshaped Housing Sector After the Pandemic

Decisions made during the pandemic—whether it was to close the country from the outside world at the beginning of the pandemic or cut interest rates to low levels, or inject stimulus into the economy—led to high property prices.

Between April and September 2020, the housing values continuously declined by 2%. As the Reserve Bank cut interest rates to historic lows, billions of dollars in the stimulus were pumped into the economy, which increased household savings. Such cheaper financing made it easier for borrowers to access more credit.

According to CoreLogic’s Home Value Index, housing prices jumped to over 24.6% from April to February 2022. As a result, residential real estate values increased from $7.2 trillion to $9.8 trillion.

By the third quarter of 2021, the household debt-to-income ratio reached a record high of 140% and increased real estate values. All of these factors combined affected the rental housing market as well. As a result, rental rates have increased from $30 per week to $470 per week since March 2020.

The current struggles of the Australian economy

Apart from the global pandemic, another recent struggle that the country is facing is the Australian bushfire of 2019/2020. It began in September 2019 and destroyed millions of properties and businesses. It also claimed both humans and wildlife in large numbers. The short-term impact of the fire on the country’s GDP includes the fact that businesses, tourism, transportation, manufacturing processes as well as farming-related activities would be affected negatively. Another effect is a further reduction of Australia’s confidence in recovering (especially since the country is still yet to recover from the pandemic’s effect). The unemployment rate is highly likely to drop even further with a resultant negative drop in the number of small businesses in the country.

An article by the Guardian speculated that the country would have to spend even more than the amount spent to recover from one of its past fire-related setbacks in 2009. During the Black Saturday of 2009 in Australia, about 450,000 hectares were affected. This is nothing close to the 8.4 million hectares that were affected by this recent 2019/2020 bushfire. The costs of these struggles will arise from health demands, daily disruption, insurance claims, and other sectors.

Low-interest rates not likely to be sustainable

The Reserve Bank of Australia (RBA) cut interest rates to a record low of 1.50% in August 2016 and rates have been unchanged since then.

Inflation has remained low with the headline rate only recently returning to the 2-3% target range, and inflation will not trigger a short-term increase in rates.

A critical market factor during 2018 will be whether low-interest rates are sustainable. If the RBA can maintain a supportive policy, demand growth will remain firm in the short term. In contrast, there will be a high risk of recession if the Reserve Bank is forced to tighten monetary policy aggressively.

The low level of interest rates will continue to provide important support to the domestic economy in the short term with solid momentum, but with expectations that conditions will become gradually less favourable.

The jobs market in focus

The employment data has remained strong with the latest data recording an increase in employment of over 54,000 for August compared with consensus expectations of below 20,000.

This report revealed the most substantial monthly increase since October 2015, although the unemployment rate held at 5.6% as more workers entered the labour force.

Overall earnings growth has been tepid despite the strength in employment. If wages growth remains subdued, there will be reduced pressure for the Reserve Bank to tighten monetary policy.

The housing sector will also be crucial

Developments within the housing sector will continue to have a very important impact during the year ahead. The low level of interest rates has been crucial in boosting the housing sector with low borrowing costs encouraging increased credit demand.
Although there has been some tentative evidence of stabilisation, there is still a serious risk of over-heating within the sector, especially with prices already close to record highs.
If there is strong evidence of overheating, there will be an important risk that the Reserve Bank will have to tighten monetary policy aggressively to curb financial stability risks.
Overall, interest rates are liable to edge higher during the first half of 2018 with the potential for more aggressive tightening later in the year.

U.S. Federal Reserve likely to increase rates

Developments in the Federal Reserve (Fed) policies will inevitably have a significant impact on the Australian outlook.
The Fed has continued its policy of gradually increasing interest rates with an increase in the Fed Funds rate to a 1.00-1.25% range at the June meeting. The Fed remains committed to a policy of gradual policy normalisation following the extended period of meager interest rates following the 2008 financial crisis.
There have, however, been increased doubts whether there will be a further rate increase this year. A restrained Fed policy would be relatively benign for the Australian economy. There is, however, a significant risk that the Fed will have to tighten more aggressively, especially if the Trump Administration finally passes substantive tax cuts.
If the Fed tightens more aggressively, there would be an increased risk that the Australian Reserve Ban would have to raise interest rates.
A tighter Fed policy would also have an important impact in triggering less supportive financial conditions, which would pose significant risks to the global economy.

China developments will also remain pivotal

China has always been a part of the Australian economy since the late 1980s, and some part of Australia is owned by the Chinese investors. After years of working together, it was speculated that the economic developments of the Chinese would not cease to positively impact the country’s economy, especially on the exporting of goods to China. However, they abandoned the Australian property market during the 2019/2020 financial market. According to recent forecasts, nevertheless, they are likely to return since there is a positive outlook of the COVID-19 vaccine in the Chinese economy. Though the Australian bushfire is a setback, it might not affect the relationship between the Chinese and the Australians.

Chinese economic developments will continue to have a meaningful impact on the Australian economy, especially given the crucial factor of commodity exports to China.

Immediate concerns surrounding the Chinese outlook have eased with increased confidence that the People’s Bank of China (PBOC) can control the very high level of debt within the economy.

There is, however, a serious threat of complacency over the Chinese outlook as countries historically have found it extremely difficult to deflate a credit bubble on the scale seen in China without triggering a domestic recession and significant downturn.

If the Chinese economy continues to expand at a firm pace, there will be strong demand for Australian exports, which will provide critical protection to the economy as a whole.

There are also reduced concerns surrounding the banking sector, even though the burden of bad debts has increased steadily.

If there is a sharp downturn in China, there will inevitably be a substantial adverse impact on the Australian outlook, and this is a significant risk to the forecast growth outlook.

Geopolitical risks important

The situation surrounding North Korea will continue to be an important focus during the year ahead.
Political tensions will inevitably continue surrounding the Pyongyang regime as the country continues to develop its nuclear programme, which puts it on a collision course with both the U.S. and China.
As long as stakeholders avoid military conflict, the overall impact should be limited. There will, however, be some risk of a serious miscalculation by either North Korea or the U.S. which would risk some form of military conflict.
In these circumstances, there would be the risk of severe damage to the Asian economy, which would inevitably have adverse consequences for the Australian economy.

The Australian Dollar

As a result of the devastating conflict in Ukraine, rising interest rates, and strong global economic growth, some economists are predicting that the Australian dollar will reach its highest in June 2021. The Australian Financial Review’s quarterly survey of 33 economics indicated that the AUD would appreciate to $76 by December.

Many economists believe the dollar is severely undervalued. This is in line with a calculation centered on the RBA’s commodity price index and relative interest rate differentials between Australia and the United States.

According to Trading Economics Global Macro Models and Analysts, by the end of the first quarter of 2022, The Australian Dollar is expected to trade at 0.74.

Will Australia face a Recession?

Australia hasn’t experienced a recession since the Global Financial Crisis in 2008. Even though the last two years have been uncertain, Australia’s economy is steadily rising.

During the first wave and lockdown, things looked dire for some because businesses started to shut down, people stopped spending money, and people couldn’t afford rent, so housing providers and companies were also affected. However, in some cases, Job Keeper/Seeker schemes and other programs proved profitable for certain businesses, and they left people with enough money for their regular spending.

Many people staying in Australia returned to their homes during the pandemic, so when businesses started operating again, there was a shortage of employees. Thus, companies had to start paying their employees more.

Over the next two years, Australians expect inflation to be 4.9% annually, up 0.1% points from December 2021. In January 2021, inflation expectations hit a seven-year high since November 2014.

References: