This year has seen the Australian political landscape change. A new Federal Government championing different priorities, but faced with the same dilemmas.
With the spectre of the Omicron variant lingering and global tensions on the rise, the global economy now faces the economic consequences of its unprecedented pandemic stimulus packages, which places Australia’s monetary supply 20 per cent above pre-pandemic levels.
With such an injection of funds, the war in Ukraine, supply chain constraints and low unemployment, inflation is now running rampant in some advanced economies. However, with strong terms-of-trade and a performing economy, Australia is well-placed to ride out the storm. The Reserve Bank of Australia (RBA) has signalled its appetite to combat inflation by hiking interest rates.
Australia is a long way from reaching standard variable home loan interest rates of the 1980’s. In June 1989, interest rates reached 17 per cent per annum, a rate maintained for nearly one year. Currently, inflation is running at over 7 per cent with estimates tipping it to reach even higher by the December quarter (the highest since the introduction of the GST in July 2000), before normalising to the RBA’s slow and steady target band of 2-3 per cent in 2024.
Inflation is higher, and it arrived earlier than expected, but with upward pressure on prices coming from post-COVID supply chain disruptions, capacity constraints, a highly competitive labour market and rising electricity, gas, and petrol prices, it’s not entirely unusual.
For some time, a decline in unemployment built pressure for wage growth, although it’s not all strawberries and cream. Some industries with elevated employment demands may be experiencing financial pressures thanks to restricted (albeit opening) labour supply and higher cost of business.
The Australian Bureau of Statistics has reported a rise in unemployment, meaning the way in which Australia resolves a return to ‘normalcy’ (both domestic and internationally), will be telling. Naturally, this affects the housing market with some markets already demonstrating a decline in housing prices. Others such as Brisbane, Adelaide and regional Australia continue to signal rapid growth.
For all the difficulties of the pandemic, comparatively speaking, Australia is well-positioned to insulate itself from the rigours of inflationary pressures however, decisive RBA action is required and for households, tweaking spending priorities will be needed until normalisation occurs.
