UNSW Sydney Media Release
While Australia weathered the pandemic better than many countries, questions about its recovery and handling of high inflation are tempering the economic outlook. Getting inflation and employment settings right will be critical, experts say – and some pain will likely be necessary.
Bruce Preston, Professor of Economics at UNSW Business School, says that while many Australians are facing a challenging period, the economy has managed well in the broader context.
“We had a global pandemic in which we shut down a range of different sectors to protect public health and the economy,” he says. “The idea that we’re going to walk away from that as a society without paying some economic cost is, I think, an overly optimistic one.”
The Reserve Bank of Australia (RBA) is now facing a critical moment in its bid to engineer a soft landing, with pressing concerns on the horizon.
“I worry that if it turns out the Reserve Bank has been overly optimistic, there’ll be a lot more inflation entrenched in the economy, in people’s inflation expectations, and it’s going to require perhaps some additional interest rate rises that might not have been warranted had they acted earlier,” he says.
Strong recovery, weak growth
The big-picture economic outlook includes continued “relatively lacklustre” growth in Australia’s gross domestic product (GDP), which grew by just 0.2% in the June quarter, says Dr Nalini Prasad, senior lecturer in the School of Economics at UNSW Business School.
“Growth has been subdued as inflation and higher interest rates have reduced demand,” she says. “This has been particularly true for households, with homeowners seeing their mortgage interest rates climb by more than four percentage points and renters seeing noticeable increases in rents.
“As a result of this, consumption has been weak. Households appear to be reallocating their spending towards essential goods and services – think electricity, health care and rents – and away from discretionary items – think restaurants and holidays.”
Prof. Preston says Australia’s economic position is clearer in the context of its recovery from the monumental challenges of the COVID-19 pandemic.
“It was a significant macroeconomic development that put a lot of stress on the Australian economy, and I think we handled that particularly well as a nation,” he says.
Ongoing inflation concerns
While inflation has been cooling in Australia, the process has been slow, with the Consumer Price Index hovering above the RBA’s target band of 2-3% for three years. The RBA now expects inflation to reach the top of the band at the end of next year.
Should inflation keep falling, the RBA will likely keep the cash rate unchanged for the rest of 2024 until it has more information about the state of the economy, Dr Prasad says.
However, there’s an important question, and now a public debate, over to what extent the RBA’s goals are feasible, according to Prof. Preston.
“The bank is in a challenging place: inflation’s high, but the labour market is very robust, and that’s something to celebrate,” he says.
Nonetheless, labour market outcomes reflect the level of demand for goods and services, and based on recent data, the RBA has judged that there is still excess demand.
“I think they’re alert to the fact that perhaps the current state of the labour market is unsustainable and are worried about how to manage that,” Prof. Preston says.
“It will require slowing the economy to ensure that demand declines by some amount to be consistent with current supply conditions,” he says. “A lot of the debate is about, well, what kinds of interest rate rises would be required to bring that situation about?”
Labour market tightness
Meanwhile, unemployment in Australia is maintaining historically low levels, although July figures showed the unemployment rate continuing a slight upward trend to 4.2%.
“While the labour market is still tight, there are small signs that there might be some loosening in the future, with job advertisements and vacancies coming down,” says Dr Prasad. A looser labour market would help to cool inflation, but this is unlikely without higher unemployment that would, in turn, lead to lower prices and wage growth.
As Prof. Preston pointed out, another concern stems from people’s perceptions of how they’re doing, which are not positive. “Not surprisingly, that reflects the fact that rising prices reduce the purchasing power of household budgets and makes people feel poorer,” he says.
“Despite the very strong health of the Australian real economy, at the end of the day, the ability to have stable inflation depends on a balance of supply and demand. My sense is that these very low levels of unemployment are probably inconsistent with long-run stable inflation.”
Prof. Preston says these challenges illustrate the RBA’s difficult path to achieving its goals of sustainable inflation and full employment.
“My view is, to the extent that there’s still evidence of a situation of excess demand, the bank probably hasn’t done enough, and that some additional interest rate rises will be required,” he says. “It’s a bit of a gamble on an unexpectedly good outcome, and I worry that if faced with a bad outcome, interest rates might have to be increased by even more than some other countries have done.”
[textblock style=”7″]
Like what we do at The AIMN?
You’ll like it even more knowing that your donation will help us to keep up the good fight.
Chuck in a few bucks and see just how far it goes!
Your contribution to help with the running costs of this site will be gratefully accepted.
You can donate through PayPal or credit card via the button below, or donate via bank transfer: BSB: 062500; A/c no: 10495969
[/textblock]
When you continue to do what you have always done, you are going to get the same results!
Different thinking and actions are required and that was needed 24 months ago at the minimum.
oh dear, there might need to be some interest rate rises. Bugger you poor bastards with mortgages, you’ll have to pay so the banks can continue to get their billion dollar profits and those of us who own our own homes can continue to get the measly 1.9% interest on our savings, and landlords can continue to get negative gearing benefits while gouging extortionate rents and inflicting pain on those unfortunate enough to have to rent in a housing shortage engineered by Howard, Costello and their successors. Meanwhile the Labor government metaphorically wrings its hands and promises peanuts.
and BTW I am well into the fourth quarter of my life, remember the Beatles and hate AUKUS and the sell-out of our sovereignty to the United States of Aggression.
Interest rates, as in usury?
Bob the borrower walks into a bank for a home loan, say $1M for argument’s sake.
Len the lender, after scribbling a couple of Xs on the doc, says, ‘Bob, sign here’.
Len takes the signed loan doc and walks down to see Fred, the finance guy.
Len to Fred, ‘Standard loan – six 0s, and one 1’. This time put the 1 in front of all the 0s you idiot.
Bob gets his $1M, buys a home, pays the loan off in 25 years, plus interest accrued of say another $1M.
Bob’s labor of 25 years is nominally valued at $2M which he pays to the bank.
Bank receives $2M in fiat from Bob via monthly installments over the 25 years.
Bank’s labor for a maximum of a few days playing on computers comes in at $2M, paid by Bob.
All based on a promissory note signed by Bob and sleight of hand by the bank, all backed by legislation.
Bob works for the bank for 25 years and the bank works for Bob for a few days max.
What an elegant design which none should question.
And some people wonder where inflation comes from.
Ah yes. Temptation and the dreaded debt!
Easy-peasy. Everybody wants to get into the act.