Australian Economy forecast for 2021/2022

Australia, the largest country in Oceania, is also one of the few developed countries with uninterrupted GDP growth for about 26 years despite its many challenges. Some of the major challenges the economy has faced include the black Monday of October 1987, the dot-com crash in 2000, the subprime mortgage crisis in 2008, Queensland floods in 2011, the global pandemic (COVID-19) in 2019, and the bush fire in recent 2020. However, the economy of Australia has continued to stand the test of trials with solid GDP growth and development. 

Historical events of Australia’s economy

As a result of the country’s economical stability, there is a high rate of disposable income. Because of this, many individuals (or groups of individuals) have been inclined to create one or more start-ups. This has resulted in the numerous amount of Small and Medium-scale Enterprises (SMEs) in the country. As a result, there is a high rate of employment opportunities, and Australia has become one of the world’s leading employers. 

On account of the growing population, Australia recorded about 1.37% of average population growth for 29 years (since 1992). However, on average, till 2017, the country enjoyed GDP growth of about 3.2% since 1992. And when compared to other surrounding developed countries, it was a good score (impressive). It was among the highest record gotten during that year. Compared to countries like the UK, Sweden, Netherlands, New Zealand, Norway, and a few others, Australia had a higher GDP report. Countries like Luxembourg, Israel, and Ireland had better growth (almost and over 5%). 

On account of the annual average GDP per capita, Australia also experienced a good amount of growth. As of 2000, there was a 3.4% annual growth from 1091, with positive peaks in late 1920, 1950, and 1980. However, in early 1920, late 1910, 1930, 1970, and early 1990, Australia’s economy suffered a bit of financial crisis that affected (slightly) the country’s GDP.

According to an article concerning the world bank’s speculation on Australia’s GDP growth rate in 2011/2012, the world bank estimated that Australia’s GDP was going to settle around 3.2% in 2011, and in 2012, 3.8%. However, according to BBC news, the growth rate was less than expected but still within the growing rate of 0.4% expansion. However, the mining economy of the country experienced a major recession despite the economy’s overall growth. 

In 2019/2020, the global COVID-19 pandemic affected the world’s economy, and Australia wasn’t excluded. The GDP fell to almost 7% in June after the unbroken 29 years record. It fell again by 0.3% in March 2020.

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The strengths of the Australian economy

Below is a summary of Australia’s economy as reported from the 2021 International Monetary Fund World’s Economic Outlook Database:

1. From 1980 till 2020 (forty -40 years), the country enjoyed a positive rate of GDP growth with an inflation rate of between 0 (zero) to 2 (two) percent. 

2. From 1980 till 2021, with interruptions in 2020 (COVID-19 aftermath), 2015, and 2012, the economy enjoyed a positive outlook of GDP growth per capita. 

3. The economy had a decline in GDP growth rate in 1983 (0.5% decrease), 1991 (1.0% decrease), and in 2020 (1.1% decrease). 

4. However, from 1980, the country is currently sitting on a GDP growth rate of 3.0% with an estimation of 2.8% in 2022, 2.6% in 2023 and 2024, and a 2.5% increase in 2025. 

5. Since 2020, the country has suffered an increase in the rate of unemployment as a result of the backlash on companies and businesses during the one-year global lockdown. However, this figure is estimated to increase in 2022. 

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.
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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

According to past forecasts, the fact that global conditions are a little tight, the Australian dollar (AUD/USD) was much likely to be undermined in 2018. This was even more realistic when there was a further increase in the interest rates of the United States (US) dollars (USD). Fortunately, there was going to be harmless for the Australian economy with a slow depreciation in the currency and interest rate. It would have even resulted in a good boost to exports. On the other hand, if the result were sharp, there would be a higher chance of inflation. However, after all the events of 2019, 2020, and early 2021, the outlook was slightly different.

The result of the recent challenges and the current state of the economy became a likely rise in the Australian dollar (AUD/USD). According to Trading Economics, AUD/USD rose to 0.85% against the US dollar (USD) from 0.758%. Top banks in Australia such as Westpac, CBA, ANZ, and NAB all predict that the AUD/USD would rise to about 5 cents higher than what it previously was. Why? The COVID-19 vaccine would help to boost the growth of the economy globally, and the government of Australia will extend its stimulus, which would, in turn, change the tides of the Australian currency. 

Will Australia face a Recession?

With all the events from 2019 till 2021, the Australian economy is at the threat of another recession. However, as of May 2019, the country was still standing strong, away from the possibility of an economic recession. With all the recent records on the unemployment rate, inflation, GDP per capita, annual GDP, and other sectors, the growth has been a little weak (especially when compared with records). In the past two years, there has been a decrease in the amount of growth recorded in every sector concerned with the country’s economic growth. But this doesn’t conclude that the country from another recession. Many scholars and concerned experts regard the season as a slow down.

The slowdown has (and will) affect certain areas of the country’s economy. For one, the housing sector would face a major meltdown, especially in the areas of the recent bushfire. And though the Chinese investors are coming back to invest and trade with the economy of Australia with regards to housing, this can only be completely back to new after the Chinese have recovered from the COVID-19. However, currently, the economy is facing a high price for the house, with lower construction rates. 

The unemployment rate has also taken its share of the economic setback with a slow and gradual increase from the last two to three years. Both businesses and country residents are victims of recent economic challenges. And though some businesses have struggled to stay afloat, more businesses have had to take a temporal (or permanent) break from the operation. This has led to an increase in the rate of unemployed Australian residents. 

But even though the numbers seem to be pointing towards a recession, the global numbers from trusted sources such as the International Monetary Fund (IMF), World bank, and the Australian Bureau of Statistics (ABS), have led to conclude that apart from the global recession as a result of the global pandemic, COVID-19, Australia still hasn’t run into any recession.