Australian Economic Overview
A strong economic recovery is well underway in Australia, as the economy has proven resilient to the impacts of the COVID-19 pandemic and unexpected events such as recent flooding in parts of Australia and the situation in Ukraine. The major drivers of this recovery include the stronger than expected momentum in the labour market and resulting consumer spending, as well as recent price surges in Australia’s commodities on the global market.
Current economic performance
At this stage, Australia has been moderately impacted by global inflationary pressures compared to many other advanced economies, with its inflation reaching a 13 year high in the middle of 2021, but reducing since. Soaring oil prices and supply chain disruptions are among some of the major factors that have influenced the increase in the inflation rate in Australia, making an increase in the cash interest rate more plausible in the short term, in order to manage inflationary pressures.
Australia’s unemployment rate reached 4%, the lowest rate in almost 50 years, reducing the need for further wage subsidies and resulting in higher-than-predicted income tax collections.
The recent increases in prices of Australia’s key export commodities are likely to result in Australia’s trade reaching a record high in 2021-22. This will support strong profitability in the mining and agricultural sectors, with likely positive flow through to the broader economy. A significantly reduced budget deficit is the result.
Real Gross Domestic Product (GDP) is expected to grow over 4% in 2021-22, slowly reducing to 2.5% in 2023-24, after it climbed back to pre-pandemic levels during 2021. Further, the level of inflation is expected to moderate in the short term - from 4.25% in 2021-22 to 2.75% per cent in 2023-24.
The Government has transitioned to the medium-term phase of its economic strategy, with priority being placed on the growth of Australia’s economy to reduce debt and rebuild fiscal buffers. Net and gross debt as a share of GDP are both expected to decline going forward.
The continued economic recovery is expected to see the unemployment rate fall just below 4% in September 2022, nearly three percentage points below the Budget forecast from two years ago. The strong labour market is expected to accelerate wage growth to its fastest pace in almost a decade. This will be reflected in Australia’s Wage Price Index, which is forecast to increase from 2.75% in 2021-22 to 3.25% in 2022-23. In addition, average earnings per hour worked are expected to increase by 5% through the year to June 2022.
This is an impressive recovery given that last year Australia's economy had its first recession in nearly 30 years, due to economic disruption caused by the COVID-19 pandemic.
Australia’s impressive recovery from the COVID-19 pandemic, combined with the forecast impacts of this Budget, indicate Australia’s economy is tracking on a strong trajectory.
While the declining unemployment rate may be impressive, it could potentially be masking a skills shortage facing key domestic industries. This raises the question whether the Government needs to revise its strategy, shifting focus from reducing unemployment to uplifting the skills of our workforce whilst managing the real risk of inflation that threatens Australia’s economy.
Further, the soaring commodity prices are unlikely to hold in the long term, further highlighting the need for Australia to invest in new technology-intensive industries.