Prepare for testing times amid economic positives
That prospect, economics correspondent Patrick Commins reports on Monday, would be the collateral damage from the campaign by the Reserve Bank of Australia’s board to tame inflation. Ahead of KPMG releasing its latest Australian economic outlook this week, its chief economist, Brendan Rynne, warns the nation is set to be the “poster child” for stagflation – low growth matched by high inflation. According to Dr Rynne, cost-of-living pressures will remain well into next year and the RBA is set to hike rates twice more. If so, more than six million households with mortgages or rent to pay will suffer a fall in living standards, making everyday life feel tougher than the headline numbers would suggest. The RBA board meets on Tuesday but it might leave rates on hold, for now. The inflation rate of 5.6 per cent in the year to May was sharply down on the 6.8 per cent consumer price index rise in April, and the lowest rise for more than a year. But retail sales figures released last week were stronger than expected and May was a bumper month for jobs growth.
The KPMG modelling suggests that after scraping just 0.2 per cent expansion in real GDP in the first three months of this year, a crash in consumption would see growth plunge to virtually zero for the rest of the year, before a contraction in the first quarter of 2024. If annual growth remains negative to flat until early 2025, the modelling forecasts, unemployment will trend up, to 4.2 per cent by the end of this year and peaking at 5 per cent in early 2025. An additional 200,000 unemployed Australians in 18 months would increase social security pressures on the federal budget and reduce the tax take.
Corinna Economic Advisory principal Saul Eslake said the RBA had made it clear it would do whatever it took to bring inflation back under control and a sharp slowdown looked inevitable. Judo Bank economic adviser Warren Hogan said the consensus view was that the central bank would hike rates once or twice more, causing the economy to “effectively stall”, with the weakest growth either in the second half of this year, or at the end of this year and into early 2024. Mr Hogan said this should eventually give room for the RBA to start cutting rates, allowing the economy to build momentum again in 2025.
The economists’ broad message about a coming “squeeze’’ fits with the international picture that emerged from the recent gathering of central bankers in Basel, Switzerland. As Tom Dusevic reported in Inquirer on Saturday, the annual meeting of the Bank for International Settlements, the central bank of central banks, agreed that interest rates were going to have to keep rising, putting the squeeze on households and businesses as officials sought to ease demand. “The insidious damage that a high-inflation regime does to the economic and social fabric is well known,’’ the BIS report said. “The longer inflation is allowed to persist, the greater the likelihood that it becomes entrenched and the bigger the costs of quenching it.”
As loan repayments and rents increase for householders and business, the sharp rises in power prices, to take effect from this week, are also likely to add to economic pressures for those whose access to government subsidies will be minimal. On the positive side, one factor that could brighten the economic landscape in the next few years is the post-pandemic recovery in overseas migration. It will bring a record two-year net influx of 715,000 newcomers to add to our productive capacity and demand. At the same time, they will increase pressure on housing, social services and infrastructure for the rest of the decade. Opposition Treasury spokesman Angus Taylor will wade into the issue on Monday at the Sydney Institute, arguing the Coalition needs to reposition itself as standing for private home ownership, freedom, fiscal discipline and supporting enterprise as an alternative to big-government remedies.
In setting their economic compass to steer the nation through the squeeze, Anthony Albanese and Jim Chalmers would do well to stick to tried and tested policies. Some of these are already serving the nation well, including banking the bulk of the surplus to retire debt and cut government interest payments, and building a buffer against future economic shocks. Beyond the next two years, the key economic challenge will be boosting the nation’s poor productivity performance to secure the climbing living standards Australians have become accustomed to since the last severe recession in the early 1990s.
Australians who remember the dot.com bust in 2000, and especially those old enough to remember Paul Keating’s “recession we had to have’’ 30 years ago and the severe 1980s recession, will not be surprised to see an economic squeeze in the next two years. The economy currently has some strong advantages, especially commodities returns and business and income tax receipts generating a $20bn surplus, full employment, the S&P/ASX 200 ending the financial year up 9.7 per cent and capital city property prices also on a high note. Confidence is important to underpinning economic performance, but so is realism in planning ahead. For this reason, the prediction by one of the nation’s leading forecasters of a lost year and a half of stagnant or falling economic growth needs to be taken seriously.