With rising inflation globally, can the Australian economy manage a soft landing? We hosted a webinar with special guest Paul Bloxham, Chief Economist for Australia, New Zealand and Global Commodities at HSBC. With over 200 attendees, we discussed challenges, opportunities and predictions for the Australian and global economy. Some key topics include employment, housing prices, and the federal budget.
Short on time? Here are our 5 key takeaways from the event:
During the event, we shared a couple of polls:
How optimistic are you about the global economy in 2023?
How optimistic are you about the Australian economy in 2023?
The overall sentiment of the participants was one that reflected less pessimism for the Australian economy compared to the world economy. Only 7% of participants said they were optimistic about the global economy, while 12% said they were optimistic about the Australian economy.
Top-Level Overview
As the global economy recovers from the pandemic, people are returning to their old spending habits. With lockdowns lifted in many parts of the world, spending is on the rise. Inflation rates are high due to increased demand, while supply is disrupted; shipping, manufacturing and labour market cannot keep up. Major factors like the continuous strengthening of the US dollar, the uncertainty of manufacturing in China, and the ongoing war in Ukraine contribute to the negative outlook of the global economy.
Paul mentioned that the Australian context rhymes with the global experience of inflation and economic downturn. However, the Australian economic experience is different in many ways. Understanding the local context is key in discovering the opportunities that can be taken to navigate this narrow pathway.
Key Difference of the Australian economy
- The rise in inflation happened later, which gave businesses an opportunity to prepare, and establish a level of trust with consumers.
- Wages remained stable despite low unemployment with 40% of the labour force in bargaining agreements. However, Wage growth is not picking up as fast as the global market.
- Australia is a major exporter of energy resources. With global energy shortages, Australia capitalised on the opportunity in this sector. This also revealed Australia’s unique position as a major exporter of renewable energy resources, an industry that is predicted to be on the rise.
Post-pandemic shifts in behaviour
Currently, supply cannot keep up with consumer demands. The supply shocks that hit the global economy have not happened in decades and were not predicted by central banks. This means they were not ready to respond to and manage the constrained and disrupted supply chains, the flow of labour
To respond to these unusual circumstances, central banks opted to slow down demand by raising interest rates and thus decreasing spending. Knowing that this is the intention, policymakers can rely on this predictability in the economy to make sound decisions moving forward. For Australia, the main challenge of the RBA is to make sure that the country’s economic slowdown does not turn into a full blown recession.
On the demand side, the country is seeing an increase in consumer spending especially in social activities (restaurant, cafes, theatre, etc.). While on the supply side, interest rates are going up and housing prices are going down. Because of these factors, there is an expected slowdown in spending.
Employment in Australia
This decrease in spending will impact demand for employment. Currently, Australia enjoys a very low unemployment rate at 3.5%. There are more job vacancies than there are unemployed people (due to skills mismatch) but this predicted decrease in demand for labourers will push the unemployment rate slightly.
However, with the border reopening and a higher capacity for migration intake (from 170,000 to 195,000), the labour market will be able to loosen up. This means that as job vacancies decrease and the number of labourers increase, the employment market could balance out without disrupting the economy. For the RBA, the ideal scenario would be to have wage increases happening at a steady pace (moving from 2% to 3%).
Housing prices in Australia
Housing prices are already going down because of the RBA’s decision to increase interest rates. The return of international students and the expected increase in migration will support the housing demand where currently, rental vacancies are low. These movements in housing prices will be felt more in Sydney and Melbourne compared to other regional cities. Post-pandemic, more employees have the flexibility to work from anywhere so there is no need to live in central locations. This also means that there will be more support for smaller regional centres.
Nationally, the forecast is a 15% fall in housing prices based on economic modelling.
Federal budget: Paul’s Prediction
The overall budget bottomline looks better than the previous, with more tax revenue and less spending for the government since there is a very low unemployment rate. With an expected slow down in the economy, the government will probably spend less for the upcoming budget hearing. Other than the childcare boost, there won’t be much stimulus coming from the government due to high inflation. This new administration will have to navigate their narrow pathway of doing what is best for the economy and fulfilling their election promises.
Since the event, the 2022-23 Budget has been released. You can read it here.
Final Word
Ultimately, there is cause to be optimistic about the Australian economy and how it will fare amidst a global economic downturn. Looking back at how Australia performed and remained relatively unscathed during global financial crises in the early 2000’s, the country has the right institutions and opportunities in place to manage a soft landing.
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