ANALYSIS: Several factors such as high inflation and rising interest rates have disrupted the post-pandemic economic recovery expected this year.
Many predicted that 2022, as the coronavirus went from pandemic to endemic, would be a year of economic recovery as the majority of Australia and the world opened up again.
However, as AMP Chief Economist Shane Oliver puts it, this year has instead been “dominated by high inflation, rising interest rates, the war in Ukraine and fears of recession.”
Inflation
Inflation was the headline as the cost of living surged nationally and globally.
While the worst of the pandemic seems to be in the past in terms of lockdowns and death rates, the aftermath has continued to affect supply chains.
Dr Oliver said inflation, which is the highest in decades, “largely reflects[ed] pandemic-related supply and reopening distortions, [with] a stimulus-induced demand surge”.
On top of that, Australians also had to deal with the devastating floods earlier this year, further disrupting supply chains across the country and driving up prices.
The other major factor behind inflation was the war in Europe, which had a huge impact on the price of major commodities.
When Ukraine – one of the world’s leading grain producers – was invaded, food prices around the world soared due to the scarcity of supply.
The global community’s response, imposing sanctions on Russian exports, has also seen fuel prices reach record highs, even though the The September quarter saw the first decline since the peak of the pandemic.
While wage growth has accelerated, when inflation is taken into account, real wage growth is at its worst level in more than a decade.
Increase in cash rates
The RBA, in its effort to curb this inflation, has been steadily increasing the exchange rate since April.
RBA Governor Dr. Philip Lowe has repeatedly said that tackling inflation is the RBA’s top priority, and the rate hikes are designed to remove demand from the economy in order to bring back inflation to acceptable levels.
He warned that a recession is almost certain if the current level of inflation is maintained.
At the last RBA meeting in December, Dr Lowe announced the most recent rise in cash ratesan increase of 25 basis points to 3.10%.
This policy has been reflected around the world, as AMP’s Dr Oliver pointed out.
“Central banks have moved to aggressively withdraw monetary stimulus and raise interest rates at the fastest pace in decades to cope with inflation and rising inflation expectations. “, said Dr. Oliver.
One benefit of cash rate hikes, however, is deposit rates rise sharply.
The real estate market
Inevitably, rising interest rates led to a fall in real estate prices.
“House prices have fallen sharply, reflecting poor affordability after a boom and particularly when mortgage rates have risen, reducing affordability,” Dr Oliver commented.
The 6.9% fall in prices from April to November was the biggest seven-month drop Australia has seen since 1980.
Capital cities, particularly Sydney and Melbourne, have seen the steepest decline, although the pace of decline has slowed in recent months.
Investor outlook
This economic turbulence has also seen the stock market take a hit.
Global stocks fell 23% in October.
Dr Oliver pointed to equity performance in the two largest economies as the main contributor.
“Chinese stocks led the weakness, not helped by its zero Covid policy, followed by Asian stocks, given their exposure to China and their cyclical sensitivity,” he said.
“US equities also underperformed, reflecting their high-tech exposure and aggressive Fed tightening.”
Dr Oliver said Australian equities have actually outperformed, with strong domestic commodity prices and a relatively less aggressive central bank.
However, he also said government bond prices had their worst year since 1973 as yields jumped on high inflation and rate hikes.
consumer confidence
The Westpac-Melbourne Institute’s monthly consumer confidence index has fallen into the doldrums for much of 2022.
Although there was no official recession, consumer confidence was at near recessionary levels.
The most recent data recovered slightly, however, as households expected higher interest rates and lower inflation.
consumer spending
Despite all the misfortune and gloom, the consumer retail spending hit record highs for much of 2022and has only recently slowed down.
Compared to the lockdown-affected months of 2021, double-digit percentage growth was common in 2022.
Simon Pressley of Propertyology said this challenged the rhetoric of many economic commentators.
“If cash rate hikes impact finances, we would see a big increase in home loan arrears – they are at record highs,” Mr Pressley told the Savings Jar Podcast in November.
“We would see a huge reduction in retail spending – it’s accelerating. And it’s not just accelerating on discretionary items.
“Give me a fucking spell. You can’t book a seat in a restaurant, your high-end clothing outlets and your hotels – they’re shocking. They scream for staff demand, their service is through the roof. It’s not finances that’s the problem. It’s people’s heads.”
This is reflected in credit card datawhich shows that spending is on the rise, but that the debt is relatively stable.
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