What to expect from the Australian economy in 2022?

Highlights

• The pandemic woes have created a highly volatile environment for the economy wherein uncertainty dominates all predicted forecasts.
• In the mid-year economic and fiscal update, treasurer Josh Frydenberg gave announced forecasts for the Australian economy.
• The labour market recovery may not be as smooth as some of the other sectors’ rebound as wages continue to remain below target levels.

After bolstering through 2021, Australia is all set to move into a new year with an economy that has partially emerged out of the pandemic-induced slowdown. Despite an economic revival, many indicators still seem to be lagging from their pre-pandemic values. Though forecasts for the next year seem promising for the Australian economy, government measures still need to be strengthened to keep the swift pace of recovery going.

The pandemic woes have created a highly volatile environment for the economy wherein uncertainty dominates all predicted forecasts. This volatility stems from the Omicron variant and its potential unknown impact on the economy. In the meantime, experts maintain some broad expectations of what lies ahead for Australia in the coming year. Here are a few predicted developments for Australia in 2022:

Stagnant interest rates

The cash rate has been at the centre of great mystery for the Australian economy. The Reserve Bank of Australia (RBA) has given mixed signals when it comes to raising interest rates. Though rising inflation has prompted experts to stay prepared for an interest rate hike, the RBA has not budged from its position.

In response to ongoing speculation, the RBA intends to resort to a rate hike policy only if the global inflation shock becomes more persistent than anticipated. Until then, a rate hike may not occur before 2024. Meanwhile, all eyes are now glued to the wage rate, which, if it inches higher, could trigger a rate hike earlier-than-expected.

Closely eyed inflation

The red-hot property sector is no longer an anomaly to the ongoing inflation level, as prices have been rising left, right and centre. The housing market has been subject to soaring demand and inadequate supply, which ultimately caused prices to reach new highs. At the same time, consumer prices overall seem to be offering a concerning narrative.

Image description: Experts unnerved by rising inflationary pressures.

In the mid-year economic and fiscal update, treasurer Josh Frydenberg gave updated forecasts for the Australian economy while stating that inflation is likely to reach the centre of the target band at 2.5 per cent in 2022-23. At a time when consumer prices are going haywire, all eyes will be on inflation, and efforts could be taken to eliminate all possibilities of a stagflation-like scenario.

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Improved economic growth

The Australian economy has stayed robust despite all odds during the pandemic. The economy is expected to carry forward this resilience in the next year too. As per Australia’s mid-year economic and fiscal outlook (MYEFO), the economy is expected to grow by 3.75 per cent in real terms in 2021-22. This growth is expected to fall to 3.5 per cent in 2022-23 before finally settling down at 2.5 per cent in 2024-25.

The only slowdown in the economic recovery emerged due to the Delta variant. However, the current statistics are on the favourable side, with improved vaccination rates offering some hope.

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Decent labour market recovery

The labour market recovery may not be as smooth as the other sectors’ rebound but is likely to remain decent. As per MYEFO predictions, unemployment could fall to 4.25 per cent in the final two years of the forward projections. Meanwhile, as job listings rise, increased negotiation power in the hands of job seekers could result in higher wages over the coming years.

However, Australia’s productivity has been the weakest in the past decade, as per the Productivity Commission. Thus, an increased focus would be required on improving the productivity levels within the labour market, which might need a favourable policy framework.

In a nutshell, 2022 seems riddled with fears of the new Omicron variant and subsequent threats of border closures. Additionally, as the economy leaps into another year with huge amounts of debt, the question arises on whether the economic recovery is here to stay for the long haul.

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