A Chief Economist’s Outlook: What's Next for the Australian Economy?
Paul Bloxham, Chief Economist - AU, NZ & Global Commodities, HSBC
The primary challenge facing global policymakers is ongoing high inflation.
Other key topics include:
the rise in long-term interest rates on US bond markets.
impacts of the Chinese economic situation on the global economy.
impacts of these on the Australian economy.
High Inflation
Current inflation rates are driven by the combination of loose monetary policy and strong government stimulus during COVID-19.
After COVID-19, spending increased. The supply side of the economy was not prepared for the rapid increased demand.
Central banks responded to inflation by increasing interest rates.
This has been somewhat successful, US core inflation dropped from almost 9% to 3.7%. Yet, the target is 2%. Australian inflation peaked at 8%, now 5.4% but our target is 2.3%.
Inflation has dropped but not enough.
Ongoing inflationary challenges are caused by factors like:
global trade is more complicated, adding to the cost of goods.
aging populations add to higher cost bases.
Climate change and energy costs contribute to inflation.
US Bond Market
Federal Reserve identified inflation in 2021 and increased rates. The market assumed rapid increases in rates cause a downturn and priced in that assumption.
The market has now changed that assumption given growth remains at 4.9% annualised and inflation is still high.
Most households have 30-year fixed rate mortgages in the US, so have not had to tighten due to short-term interest rates.
Continued US investment in economy through things like the Inflation Reduction Act and the CHIPS and Science Act have kept the US economy strong.
Chinese Economy
Slowed since 2022 due to oversupply in property sector and excessive leverage there. Property developers faced insolvency, with failing house prices and consequences.
Recently, the Chinese Government has incrementally provided stimulus to address this.
There are difficulties exporting into a world that is not wanting to buy from China.
Property sector remains weak. This is restraining consumer spending.
Australian Economy
COVID-19 fiscal stimulus led to savings during the pandemic, followed by strong spending. This caused rapid increases in inflation and RBA responses.
Lifted rates by 4% since May 2021, to get inflation to slow from 8% to 5.4%.
RBA wanted rate increases without a downturn. Did less tightening than US, UK and NZ.
This is partially because inflation and wages growth was lower in Australia.
Increasing rates in Australia has a bigger impact due to more variable rate mortgages.
Inward migration is driving population growth, leading to a tighter housing market and stronger consumer spending.