Q4 2021 – Australian Economic Overview

The Australian economy is rebounding strongly from the impact of the Delta outbreaks, underpinned by Australia’s high vaccination rate and effective policy support.

The pandemic will continue to pose headwinds for the global and domestic recovery for some time to come, as demonstrated by the recent emergence of the Omicron variant. However, Australia’s high vaccination rate and increased investment in health system capacity, together with ongoing improvements in vaccines, are likely to assist in mitigating the downside risks to the economic outlook.

According to the OECD, Australia’s economy is forecast to grow by 4.1% in 2022 and by 3.0% in 2023. While the Delta outbreaks disrupted activity, the effect on growth was less than initially expected. The recovery is being supported by broad-based momentum across both private and public demand. Economic growth is forecast to remain solid over the next three years as both the domestic and international recoveries continue.

Annual Australian Economic Growth

Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for a strong expansion that is forecast to see the unemployment rate fall to 4.25% by the June quarter of 2023. This would represent the first time since before the Global Financial Crisis that Australia has sustained an unemployment rate of below 5% and only the second time since the early 1970s. The tighter labour market will support a steady increase in wage growth as firms compete to attract and retain labour.

Overall, the outlook for the labour market is positive with elevated job vacancies and employment advertisements signalling a rebound in labour demand. Job vacancies reached a record high in May 2021 prior to the Delta outbreak with job advertisements for November 2021 at the highest level since 2008.

Household and business spending are expected to contribute to ongoing momentum in demand with $370 billion in additional cash savings since the beginning of the pandemic providing financial backing for a strong pick-up in spending. Pent-up demand is expected to drive the near-term rebound in household consumption before stronger fundamentals from a tightening labour market drive sustained income and consumption growth in the latter part of the forecasts.

Business sector confidence has rebounded on the back of reopening and remains supported by temporary business tax incentives for investment and the ongoing impact of small business tax cuts. This is translating into a willingness to invest with non-mining capital expenditure intentions for 2021/22 at record levels. The mining investment outlook has also been upgraded following Woodside’s recent decision to proceed with the major US$12 billion Scarborough gas project in Western Australia.

Dwelling investment is forecast to increase by 6% in 2021/22, before falling by 2% in 2022/23 as investment eases from an elevated level. Government incentives, such as the HomeBuilder program, alongside low interest rates and rising housing prices have supported a large pipeline of work in the sector, particularly for detached houses. Near-term capacity constraints are expected to see residential construction activity spread out over a longer period than usual as building material and labour shortages extend completion times and raise costs.

The reopening of international borders will lead to a return to positive net overseas migration and higher population growth that will in turn support consumption growth. Net overseas migration is forecast to be around -41,000 persons in 2021/22, before increasing to 180,000 persons in 2022/23, 213,000 persons in 2023/24 and 235,000 persons in 2024/25.

In a move to address workforce shortages across the country Australia will temporarily waive the visa application fees for international students and backpackers. Working backpackers will have their visa application fees wiped for the first quarter of 2022, with a number of critical industries struggle to retain staff through the latest COVID-19 outbreak, which has forced tens of thousands of workers to isolate after exposure to the virus.

In the near term, further upward pressure on construction costs of new dwellings, and global fuel and traded goods price pressures will contribute to stronger inflation outcomes. However, these pressures are expected to moderate over 2022. Consumer price inflation is forecast to be 2.75% in the June quarter of 2022 and 2.5% in the June quarter of 2023.

At its most recent monetary policy meeting, the Reserve Bank of Australia decided to keep the cash rate unchanged at the all-time low of 0.10%. It also left the target for three-year government bond yields at around 0.10% and stated it will continue purchasing government bonds at the rate of AUD 4 billion a week until at least mid-February 2022 in order to maintain accommodative financing conditions.

While the emergence of the Omicron strain was a new source of uncertainty, the RBA remains confident of the recovery of the Australian economy but the RBA is not expected to rise rates until 2023.

The RBA maintained a dovish stance in its communication, stating that it is “committed to maintaining highly supportive monetary conditions to achieve a return to full employment”. Moreover, it ruled out hiking the cash rate before inflation establishes itself within the 2.0%–3.0% target range sustainably, which it does not expect to happen before 2024.

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