What does RBA expect from the Australian economy in 2022?

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 What does RBA expect from the Australian economy in 2022?
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Highlights

  • The RBA Governor recently presented the outlook for the Australian economy in an address to the National Press Club of Australia.
  • At present, labour market strength and rising inflation are shaping up the Australian economy.
  • The RBA awaits the fulfillment of the inflation and wages growth target before raising interest rates.

In an address to the National Press Club of Australia, the Reserve Bank of Australia’s (RBA) Governor Phillip Lowe reiterated the central bank’s long-held stance on interest rates. While restating that the RBA would ‘take its time’ before embracing the rate hike, Lowe highlighted different challenges of making policy decisions in a highly volatile scenario, such as a pandemic. Meanwhile, the Governor presented the outlook for the Australian economy in 2022 in its recent speech.

The latest speech was closely followed by the RBA’s announcement on the termination of its bond-buying program. The ongoing recovery seen across major economic indicators allowed the central bank to gradually withdraw its stimulus measures.

RELATED READ: RBA ends bond buying program, keeps cash rate on hold

The Governor added that Australia’s post-pandemic recovery has been ahead of expectations and eventually led to heightened inflationary pressures. Another sensitive point tackled by Lowe was the supply-side disruptions, which have seeped into the economic activity and prices.

Let us now shed some light on the central bank’s projections for 2022 in terms of economic indicators:

GDP

As per the RBA, the Australian economy performed substantially better last year than its expectations. The Governor highlighted that the GDP growth is expected to have been around 5%, in comparison to the central bank’s forecast of 3.5%. The revised upward projection is despite the setback caused by the COVID-19 Delta outbreak.

The central bank now expects the economy to grow by 4.25% in 2022 and about 2% over 2023 in its central forecast.

Unemployment rate

Australia’s unemployment rate dropped to 4.2% in December 2021, which was a significant feat being the lowest in 13 years. In its central forecast, the RBA expects the jobless rate to drop even further to around 3.75% by the end of 2022. The Australian economy has not experienced an unemployment rate below 4% since the 1970s. Thus, one can say that the labour market has benefitted exceptionally from the removal of lockdowns.

Labour market has recovered as demand for labour has spiked.

The unemployment data has shown the country’s resilience even in times of uncertainty. Labour market strength in Australia has surpassed levels seen in the United States and the United Kingdom, where labour force participation has declined in recent times.

Meanwhile, job advertisements in Australia have been at an all-time high, pointing to the fact that there is a huge spike in demand for labour. In fact, many businesses expect to increase their labour headcount over the coming months, paving the way for further growth in the labour market.

Inflation

Inflation has been going haywire on the back of a swiftly recovering economy, underpinned by rebounding demand and supply chain constraints. Meanwhile, undercurrents of rising input costs and shipment delays have also shaped up a rise in prices. This aspect of inflation is more concerning and might cause pressure on the central bank to devise a quick strategy.

Inflation has risen due to different factors.

For the coming year, the RBA expects inflation to rise further to 2.75% over this year and next in its central forecast. Over time, the central bank sees stronger growth in labour costs to become the more significant driver of inflation.

ALSO READ: Is an interest rate hike on the way in Australia?

Wages

Wages growth has been evidently slow in Australia and has been acting as a major deterrent before the RBA in its decision to increase cash rates. However, Governor Lowe stated that wages growth has remained strong and reached rates prevailing before the pandemic. But a further pick-up in wages growth is expected.

Governor Lowe highlighted that multi-year enterprise agreements are somehow behind the existing stagnation in wages. However, labour costs are projected to rise, not just in terms of wages but also in terms of superannuation costs. Overall, the RBA expects the Wage Price Index to increase by 2.75% in 2022 and by 3% over 2023 in its central forecast.

Bottom Line

The RBA has time and again highlighted the importance of achieving the inflation target before any changes are made to the cash rate. However, Governor Lowe stated that the economy is closer to full employment right now than it has ever been. The past year has been crucial in acclimating to the virus and getting used to a new way of life. However, the nation has exhibited great adaptability, which has allowed the economy to come out of pandemic induced burdens.

INTERESTING READ: Australia seeks to join EU's trade row talks against China

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