Event Highlights: ‘Why is Australia different and why are interest cuts some time away?’ with Paul Bloxham
In a highly engaging session last week, Paul Bloxham, Chief Economist for Australia, New Zealand, and Global Commodities at HSBC, discussed the global and Australian economies. He discussed the ongoing challenges posed by inflation, interest rates, and the property market, as well as the broader global economic landscape. He also explored how Australia’s economic trajectory differs from other nations, particularly the US and Europe, and why interest rate cuts are still some time away.
The session opened with this poll:
Most participants were uncertain, reflecting the cautious sentiment around global economic recovery.
Global economic overview — Recovery amid shifting geopolitics
- Unusual global forces: Paul highlighted that the global economy remains in a state of flux due to the pandemic’s aftershocks, inflation, and geopolitical challenges such as the war in Ukraine. Inflation spiked to levels not seen in decades, forcing central banks to raise interest rates aggressively. However, the global economy is in better shape than expected, with inflation starting to ease in many regions.
- Pandemic recovery and inflation: Paul explained that the surge in post-pandemic demand, combined with supply chain disruptions and the Russia-Ukraine war, triggered global inflation. While demand has since slowed, the US has managed to maintain economic growth thanks to increased productivity and inward migration. Europe and New Zealand, by contrast, have been in recession for the last two years. The upcoming US election could further shape trade policies, particularly if a Trump presidency materialises.
- China’s economic struggles: China continues to face substantial challenges, particularly in its property sector. Paul noted that property investment in China has dropped by 40%, and many developers are now insolvent. China’s pivot towards energy infrastructure has been driving growth in the country. Many countries however, are in support of enforcing trade protectionist barriers to protect their own energy infrastructure.
- Geopolitical concerns: The ongoing war in Ukraine and tensions in the Middle East continue to create volatility in commodity markets. However, the US, now the largest oil producer globally, has helped stabilise the oil supply. While India remains a bright spot with growth at 6-7%, its economic relationship with Australia remains limited.
Australia’s economic outlook — Why Australia is different
- Strong population growth: Australia’s economic resilience is underpinned by strong population growth, driven by higher-than-expected migration. Over 560,000 migrants entered Australia last year, doubling initial projections and driving demand for housing and jobs. This population surge has helped the economy avoid recession, despite global uncertainties.
- Inflation and interest rates: While inflation in Australia has come down from a peak of 9% to 3.9%, it remains above the Reserve Bank of Australia’s (RBA) target. Paul emphasised that interest rate cuts are unlikely before mid-2025 as the RBA remains cautious, prioritising full employment and slow inflation reduction. The RBA will continue to monitor both inflation and labour market conditions before making any further moves.
- Housing market dynamics: The Australian housing market remains highly unusual. Despite interest rates rising from 2% to 6% since the pandemic, house prices are at an all-time high. This is because of the migration boom and increased demand for housing. Paul highlighted that the construction sector is working hard to meet this demand, but supply-side challenges and capacity constraints need to be addressed.
- Labour market and productivity: While Australia’s job market remains strong with record-high participation rates, productivity growth is a major concern. Australia’s pandemic policy, which focused on wage subsidies and job protection, has helped preserve jobs but prevented the economic adjustments necessary for productivity gains. Paul stressed that Australian policymakers must prioritise lifting productivity to improve living standards and bring down inflation faster. This includes reforms in industrial relations, competition, and regulatory environments to better manage supply and demand.
- Government spending: Public sector job creation, particularly in healthcare and social services, has been a key driver of employment growth. However, public demand is currently crowding out private demand. This trend is likely to continue as the government ramps up spending in the lead-up to the next election. Paul noted that the construction industry must also focus on improving productivity to meet the high demand for housing and infrastructure projects.
- Policy considerations: Paul discussed the need for the government to carefully consider potential changes to negative gearing policies. He also emphasised the importance of developing a serious agenda around productivity improvements as part of the election discussion. This would help ease inflationary pressures and potentially lead to interest rate cuts sooner than expected.
Final words
Australia has managed to avoid a recession, thanks to strong population growth and a resilient labour market. However, Paul emphasised that productivity improvements are essential to sustaining economic growth and reducing inflation. Interest rate cuts remain unlikely until at least mid-2025. Policymakers must focus on reforms that address supply-side challenges and improve the regulatory environment. The global economic outlook remains uncertain, particularly with key events like the US election and China’s economic struggles on the horizon. As always, the resilience of Australia’s economy will depend on the government’s ability to manage these risks while ensuring long term productivity and growth.
Paul has hosted many webinars with Moir Group over the years. Some include ‘Will Australia have a recession or not?’ in 2023 and ‘Navigating a narrow pathway — Can we manage a soft economic landing?’ in 2022.
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