Q1 2022 – Australian Economic Overview

The Australian economy has proved remarkably resilient to the ongoing impacts of the pandemic, consistently outperforming expectations and all major advanced economies. Forecasts for economic activity have been revised up significantly, reflecting stronger-than-expected momentum in the labour market and consumer spending.

A strong economic recovery is well underway with a record proportion of Australians in work. The recovery is forecast to continue and to drive further employment growth. The unemployment rate is now forecast to reach 3.75% in the September quarter of 2022, the lowest rate in close to 50 years. The strong labour market is expected to see wages growth accelerate to its fastest pace in almost a decade.

Real GDP is forecast to grow by 4.1% in 2022. Stronger-than-expected consumer spending and employment outcomes have led to an upgrade to economic growth projections. Real GDP is forecast to grow by 2.5% in 2023 and 2.3% in 2024, with broad based growth in consumption, business investment and exports.

Annual Australian Economic Growth

Both business and dwelling investment are expected to pick up, following lockdowns and temporary supply chain disruptions weighing on activity in late 2021. Public consumption is also expected to support activity, primarily driven by elevated COVID-19-related health expenditures.

The ongoing pandemic, Russian invasion of Ukraine, strained supply chains and rising inflationary pressures all present risks to the global and domestic outlooks. Nonetheless, the resilience of the Australian economy throughout the pandemic demonstrates that the economy is well placed to adapt to these new developments.

A range of factors are driving up global inflationary pressures. Elevated demand for goods, particularly in the United States, has strained international supply chains and put upwards pressure on goods prices. At the same time, there has been a sustained period of near-record global energy and agricultural prices.

Australia has been affected by these global factors, but domestic inflationary pressures are more moderate. Headline inflation in Australia picked up in 2021 however the outlook remains for Australian inflation to peak well below that in most other advanced economies, with inflation expected to rise to 4.25% through the year to the June quarter of 2022. This reflects higher global oil prices and ongoing supply chain pressures as well as price pressures in the housing construction sector.

Given that inflation pressures in Australia are less than in many other countries, financial markets expect the RBA’s monetary policy normalisation to lag behind other central banks such as the Federal Reserve, Bank of England and Reserve Bank of New Zealand, who have already started to raise policy interest rates. Nonetheless, monetary policy is expected to begin to normalise from historically low levels in Australia, with the market pricing in a tightening cycle from mid-2022 until 2024.

Household consumption growth is expected to remain strong in 2022/23 and 2023/24, supported by higher household incomes as employment increases and wage growth strengthens. Consumption growth will be driven by increased services demand as household spending behaviour normalises and the savings rate declines. Companies are expected to rebuild inventories that have been run down through the pandemic, contributing to growth.

Dwelling investment is forecast to grow by 5% in 2021/22 and a further 3.5% in 2022/23. Low interest rates, rising housing prices and government incentives, such as the HomeBuilder program, have contributed to a record pipeline of work yet to be done in the sector.

Building material and labour shortages, along with COVID-19 outbreaks and related restrictions on activity, have increased construction costs and completion times for new dwellings. These supply-side pressures have constrained dwelling investment in recent quarters, particularly for detached houses, despite a record number of detached houses under construction.

Rising interest rates will increase the cost of borrowing, placing downward pressure on housing prices and softening demand for investment in new housing. While this is expected to weigh on dwelling investment and contribute to a slight fall in 2023/24, the existing pipeline of work will support investment to remain at elevated levels.

The outlook for business investment is strong. In 2021/22 and 2022/23, investment will be supported by further recovery in the domestic economy, temporary business tax incentives and strong business balance sheets. New business investment is forecast to grow by 5.5% in 2021/22, 9.0% in 2022/23 and 1.0% in 2023/24.

Non-mining business investment is expected to drive growth in overall business investment over the next two years. Non-mining business investment is forecast to rise by 7.0% in 2021/22 and 9.0% in 2022/23, to reach its highest quarterly share of the economy since 2011 in the June quarter of 2023. Growth is then expected to slow to around 1.0% in 2023/24 with investment activity remaining at elevated levels.

Mining investment is forecast to rise by 0.5% in 2021/22, 9.5% in 2022/23 and by 1.5% in 2023/24. Iron ore investment is continuing, largely reflecting investments to maintain production capacity.

The reopening of international borders is expected to generate a return to positive net overseas migration and higher population growth, which will support higher consumption growth. Net overseas migration is forecast to increase from -89,900 persons in 2020/21 to 41,000 persons in 2021/22, before increasing to 235,000 persons in 2024/25 and 2025/26.

Russia’s invasion of Ukraine presents a risk to the near-term outlook for inflation, given its potential to further increase energy prices, especially for automotive fuel. Prolonged supply chain issues, associated with the current or future widespread COVID-19 outbreaks in China, present risks to inflation that may persist through 2022 and 2023. The recent floods in Queensland and New South Wales may also impact food prices and add to existing challenges on the supply of construction materials and labour.

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