Low employment and high commodity prices set to end but won’t damage economy: Deloitte

Australia has had a stellar recovery from Covid-19 but its boom run is about to end, Deloitte says in its latest quarterly business outlook.

Commodity prices can’t rise much higher, Deloitte says. Picture: Bloomberg

Boom times of low unemployment and high commodity prices are nearing an end, while the “cheapest credit the world has ever known” is disappearing faster than expected, Deloitte says in its latest quarterly business outlook.

The consultancy says Australia’s economy has defied typical global recessions but did not attribute the strength of its performance to Covid-19 alone.

“Over and above that, the world is throwing more money at Australia than ever before,” it said.

“Usually the world gives Australia a pay cut in global recessions, marking down the price of the stuff we sell to others.

“Not this time. Relative to import prices, export prices spent most of 2021 at record highs – higher than at the top of the resources boom a decade ago.”

But Deloitte says while Australia has “ridden the current wave spectacularly well”, swiftly recovering from the pandemic, it has “taken us about as far as it can”.

“Initially the government was simply aiming to get unemployment back under 6 per cent. Now the nation is within a whisker of seeing unemployment at 3.5 per cent. That’s stunning. Now comes the tricky bit … Commodity prices will fall, and interest rates will rise. Neither should enormously damage Australian economic growth, but the best of this cycle may soon be behind us,” the report reads.

“Winter is coming. The cheapest credit the world has ever known started disappearing in 2021. That was always going to happen, but it has been hastened by the way Covid and war have cut supplies and boosted costs across a range of products.”

But Deloitte is upbeat on inflation, saying it could fall as a result of Russia’s invasion of Ukraine and if supply chain disruption stabilises. “The recent surge in inflation in Australia isn’t due to demand or to labour costs – neither of those are doing anything out of the ordinary. And the Australian dollar is pushing inflation gently down, not up,” it notes.

“Accordingly, inflation has surged because of ‘everything else’ – basically, Covid and war-driven cost impacts. Unless, and until, wages take off … continuing rapid inflation requires Covid and war-driven cost impacts to get steadily worse. We can’t say we’re big believers in that.

“If supply snarls get no worse and Russia’s war stops raising commodity prices even further, then inflation will fall away of its own accord even if supply stays short of demand.”

While the US Federal Reserve is battling to contain inflation – which accelerated to 8.5 per cent in March, hitting a four-decade high, driven by skyrocketing energy and food costs, supply constraints and strong consumer demand – Deloitte says Australia is different. The Reserve Bank is expecting core inflation to be above 3 per cent year-on-year in the March quarter.

“Inflation in Australia is less risky. Demand is at trend, labour cost growth is modest, and the Australian dollar is up,” it said. “If it weren’t for imported costs – including petrol and shipping – our inflation would be well-contained. But central banks move in convoy, and an impatient RBA seems set to raise rates imminently.

“Yet one consolation is that markets are unlikely to be right that the RBA’s cash rate will be over 3 per cent by late 2023. That would sharply slow the economy and overachieve on cutting inflation. Meantime, the Australian dollar hasn’t followed commodity prices into the stratosphere. That should also limit its falls once commodity prices settle back towards more sustainable levels.”

Both the Reserve Bank of New Zealand and the Bank of Canada have hiked their benchmark rate by 50 basis points this month, with the US Federal Reserve expected to deliver a hike in May.

Economists, meanwhile, expect the RBA to follow as early as June.

Originally published as Low employment and high commodity prices set to end but won’t damage economy: Deloitte