Al-anwar Newspaper English news in Australia
Despite the odds, Australia largely withstood the global economic hurdles of 2022.
But as the global slowdown worsens, it will be difficult not to get dumped by that wave.
Despite large parts of the country starting this year under an Omicron COVID haze, the past 12 months delivered many surprises to the upside.
Unemployment has hovered around 3.5 per cent since the middle of the year as the economy grew just shy of 6 per cent in the 12 months to September.
But those numbers are expected to start going the other way, as rising inflation and interest rates see spending power diminish.
Staving off soaring inflation has been the theme the world over.
“We’ve had some significant challenges in the global economy, particularly around the conflict in Ukraine,” said KPMG partner and senior economist Sarah Hunter.
“That as a humanitarian event is obviously a catastrophe, but the economic impacts of that have been clearly very damaging in terms of the supply of raw materials of fuel, particularly oil, and that’s just generated substantial inflation and cost of living pressures around the world and we’re certainly not immune here in Australia.”
Inflation reached double digits in the US and UK this year, and Deutsche Bank’s Australia chief economist Phil O’Donaghoe said it is creating a nightmare for central banks the world over.
Inflation is tipped to peak here in the December quarter numbers, which will be released in late January.
“It feels like we’re peaking now between 7 and 8 per cent,” said Dr Hunter.
She expects global factors will see domestic food and fuel prices come down fairly quickly next year, taking headline inflation lower to about 4 to 4.5 per cent.
“But the challenge for the RBA is getting from that point, to that 2 to 3 per cent band,” she argued.
“I think that’s going to be the big story for next year, how much further for rates, how long do they hold and how quickly do we see the pricing dynamics and inflation ultimately being consistent with 2 to 3 per cent.
“I don’t think we’ll get there next year, but we would very much want to see quite a lot of progress towards the band through the second half of the year.”
Mr O’Donaghoe is cautiously optimistic about price falls.
“We’re hopeful that we’re close to a peak in inflation, that 2023 looks less aggressive in terms of increases in prices,” he told ABC News.
“But there’s a lot of uncertainty about just how that’s going to pan out and the long-term consequences for growth, if central banks fail to get inflation back closer to target over the next year, or the next couple of years, that can be very, very detrimental.”
The Reserve Bank of Australia, like just about every other central bank globally, lifted rates throughout 2022.
In April the official cash rate was 0.1 per cent, it ended the year at 3.1 per cent.
“Globally, most central banks have really been caught out by the pace of increases in inflation and ended up raising interest rates a lot more than they expected at the start of this year,” explained UBS Australia chief economist George Tharenou.
The RBA has slowed the pace of hikes and will likely pause soon.
“Now that we’re seeing signs of the global economy slowing sharply and domestically inflation looks like it’s peaking out at a lower level than previously feared, there is scope for the RBA to consider slowing down the pace of rate increases and even pause over coming months,” Mr Tharenou added.
The RBA’s first meeting for the year will be on February 7.
“My expectation would be that as we go into 2023, the bank will need to do at least another couple of rate rises, so perhaps one in February and one in March,” said JBWere chief investment officer Sally Auld.
But, Dr Auld noted, if wages grow too fast (a warning also made by the RBA Governor Philip Lowe) and services inflation remains high, the bank may see cause to hike again later in the year.
“I think there’s still a story to emerge in terms of where we will see wages growth go — and what happens to services inflation, which is really important, because it tends to be the persistent part of the inflation story.”
“My expectation is the numbers we’re going to get on wages and services inflation are probably going to be a little bit concerning to the RBA next year and justify the case for more hikes.”
The full impact of the 3 percentage points worth of rate hikes in 2022 are still working their way into the economy.
But since May, national property prices have slumped 7 per cent.
“In a historical context, the peak to trough decline in house prices nationally, already at 7 per cent, is one of the largest on record,” said Mr Tharenou.
“I would expect that as more and more households face the expiry of fixed rate loans from very low interest rates to very high levels, there’s going to be more pressure on the housing market over the next year.
The pace of price declines slowed toward the end of the year and Mr O’Donaghoe thinks it will continue to level off.
“As months pass by, we’re going to get smaller and smaller declines, so I think nationwide, we should, by the middle of next year be thinking about minus 15 per cent year on year,” he said.
“But to put that in context, at the top of the cycle, prices were growing by a little over 20 per cent year on year.
“That’s an amplified cycle, it’s not a house price collapse.
“After that we should expect to see that sort of the growth rate starting to move into positive territory by the end of 2023, certainly by the start of 2024.”
Mr Tharenou noted, while the current low rate of unemployment is good for people looking for a job, it’s not going to stay around 3.5 per cent.
“From a policymaker perspective, the tightening of interest rates is actually designed to push up unemployment to a more normal level to avoid having too much wage and inflation pressure,” he said.
“So the question is, ‘how much?’, so this is the balancing act the RBA faces because they would like to see a soft landing in the economy, without a severe recession.”
Dr Auld added while Australia is unlikely to hit a technical recession, that is two consecutive quarters of negative GDP growth, it will feel like a recession for some.
“I do think it would be possible to get a big enough lift in the unemployment rate such that, things felt a bit more recession-like.”
“It’s not our official forecast, but I think we’re going to sail pretty close to that, given our expectation that the RBA has still got a bit more work to do on rates,” she explained.
Mr O’Donaghoe agreed, as the unemployment rate picks up, it will feel like a downturn.
“I think the unemployment rate’s going to rise by about one per cent and I think that is a much more sensible, kind of a welfare definition, of a recession,” he said.
“But put that in context — we’re coming from a 3.5 per cent unemployment rate to 4.5 per cent by the end of next year.
“If you look back through history, a 4.5 per cent unemployment rate is still very, very low, so that is a pretty mild recession.”
While it’s probable Australia won’t enter a technical recession, other countries are projected to do so and in a globalised world, that will impact us.
At its November meeting, the Bank of England noted the UK was in recession and warned it was facing its longest recession since records began.
The European Commission expects the European Union to contract in the last quarter of 2022 and the first quarter of 2023 – plunging the eurozone into a technical recession.
The jury is out as to whether the US will record two consecutive negative quarters.
As China, our biggest trading partner, battles on with its zero COVID policy and a significant property downturn, its economy continues to slow down.
But Mr O’Donaghoe said a fully reopened China, possibly in mid-2023, will be welcome news.
“That’s still a long way away, but I would expect we would see some strong support for our growth, once that reopening really kicks in.”
Australia’s latest GDP figures, for the September 2022 quarter, showed a slowdown in growth, at 0.6 per cent for the quarter and 5.9 per cent for the 12 months prior.
But it was potentially the last hurrah for us.
“I do think that we are going to see a really marked slowdown in the pace of GDP growth next year, and there’s no avoiding that,” said Dr Hunter.
“We shouldn’t be too concerned about that.
“This year has been a year of rebound, certainly the first half of the year, and we rebounded really strongly, and were outperformed, but we can’t continue to rebound, that has to come to an end.
“So next year, GDP growth is definitely going to be weaker than this year.”
