Inflation is at a global high, but what does this mean for Australia? Will we have a recession or not? In our most attended session in the past 17 years, our special guest Paul Bloxham, Chief Economist for Australia, New Zealand and Global Commodities at HSBC, shared his take on the current economy, and what to expect in the coming months. From the upcoming US election to local employment rates and keeping your finger on the pulse of housing prices, Paul covers these and more.
Here are our 7 key takeaways from the event:
- Global factors that pose the greatest risk to the economy include the US election, China’s growth, and uncertainty in the Middle East.
- Inflation rates have improved globally and are moving in the right direction, but they still need to come down further.
- Australia experienced exponentially high population growth after the pandemic, impacting housing and boosting the supply of labour.
- The energy transition will be disruptive to the global economy in the coming years, but Australia is in a good position to profit from these changes.
- The economic effects of the war in Ukraine has faded as Russia funnels commodities through alternate networks.
- In Australia, inflation is slowly coming down and seems to be moving in the right direction for the RBA to meet its objective.
- Will Australia have a recession or not? It is hard to have a recession when population growth is so strong.
During the event, we shared a couple of polls:
Are you optimistic about the global economy in 2023?
Are you optimistic about the Australian economy in 2023?
Although attendees were more optimistic about the Australian economy than the global economy, the general outlook for both polls was negative with the majority of voters choosing “somewhere in the middle” or “no.”
Global Overview
The primary challenge for policy makers in western countries is that inflation is still too high. Although it has improved and is moving in the right direction, Australia, the United States and the European Union are still well above where central banks target. AU came down from 8% last year to 5% today, the US peaked at a little under 9% last year and is now down to 4%, and the EU dropped from 11% to 4.5%.
This drop in rates this far has been due to the post-pandemic recovery. We have seen more manufactured goods, recovered supply chains (lowered shipping costs), and increased population growth, which has freed up labour supply. Moving forward, there are still tough times ahead for the global economy with increased services, rent and electricity costs.There is no conversation to be had around cutting interest rates, either. The problem is yet to be solved, and inflation rates must come down further across the globe.
Key Difference to the Australian economy
- Australia experienced a post-pandemic population boom that continues to affect the economic landscape and inflation rates, including employment and housing especially.
- Consumption per capita is falling outright, however with the influx of migrants to Australia, consumption as a whole isn’t falling.
- Australia is somewhere between the EU and US when it comes to work to be done to lower inflation rates
Post-pandemic population boom
Last year, the Australian government predicted that with the border reopening, migration intake would be anywhere from 170,000 to 195,000. Instead, Australia welcomed half a million migrants to the country. With an influx of people to spend money came a greater demand for goods and services, as well as housing. With immigration at a high, the labour market is also loosening up with many skilled migrants entering the employment market.
This population boom however, is expected to slow down and level out into next year. The influx of migrants was largely due to the swing-back from the border closures during the pandemic. It is not projected that immigration will step up in the same way as it has again, and its slowing will help to lower inflation rates.
Employment in Australia
With increased migration, there are more skilled workers in the market able to fill positions that would have otherwise sat vacant. However this does not seem to be filling the skills gap as the unemployment rate has been gradually climbing. This time last year, unemployment was at 3.5%, last month, at 3.6% and this month it is now at 3.7%. Although it has climbed, it also tends to jump around, which Paul emphasised.
Housing prices in Australia
Due to the population boom, we saw a shortage of housing (and in turn, a higher demand) which drove up the cost of rent, house prices and interest. Housing prices are expected to continue to grow slowly, but not fall outright. The only way that might happen is if unemployment rates rise quickly. Paul warned, we can’t rule out the global risks, but on the basis of what we know for Australia, it doesn’t look like unemployment rates will jump. In other words, it is difficult to get house prices to come down in Australia at the moment.
Final Word
The global economic landscape is looking bleak with substantial risks on the horizon. However, Australia is in a good position, especially due to the population boom. “It’s hard to have a recession when the population is so strong,” said Paul. Regardless, Chief Financial Officers (CFOs) should be planning for a sustained period of sluggish economic growth — this is the only pathway for inflation to come down. CFOs should also stay on their toes as the story of the US, China and the Middle East unfolds.
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