Why 2022 could be a bumpy ride for Australian economy?

Highlights 

• Despite buoyant expectations, the Australian economy has to navigate certain challenges in 2022.
• Rising inflation has triggered stagflation fears, while the timeline for an interest rate hike remains unclear.
• Significant damage has been done to the business and consumer confidence amid growing uncertainty around the Omicron strain.

As the Australian economy enters into 2022, some key events are anticipated to make or break its ongoing pace of recovery. In fact, the well-positioned Australian economy has urged policymakers to create fairly buoyant expectations for its performance in 2022.

Despite growing optimism, the new year seems to be full of challenges, which could be the new norm under pandemic-infused environment and repressed supply conditions. Some positive reinforcement in the new year is brought by rising employment levels that could prompt a slow improvement in wages this year.

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No doubt, the economic recovery has been robust following the removal of Delta variant induced lockdowns last year. However, some challenges that could make 2022 a tough ride for the Australian economy, should be brought to the forefront. Here is a closer look at some of these challenges:

Rising inflation

At a time when central banks across the globe are pulling the brakes on their monetary easing policies, the Australian central bank has taken a relatively slower route in embracing contractionary policies. The Reserve Bank of Australia’s (RBA) initial tight-lipped stance on interest rates was followed by cryptic indications of when the bank would finally go ahead with raising the cash rate.

This has developed scepticism among the masses, with enraging inflation in the back paving the way for stagflation fears. While some suggest inflation may very well be containable, others are worried if prices will go berserk in 2022 amid a lack of policy action. However, most economists agree that transitory inflation is now lasting longer, for about 12 months. Overall, the high demand for goods is likely to keep up the price of consumer goods this year.

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Omicron fears gripping the market

The market is still adapting to the new Omicron variant, with experts examining how persistent the new strain’s impact could be on the health and financial conditions of the country. However, significant damage has been done to the business and consumer confidence as uncertainty continues to prevail in the community.

The unclear outlook that the Omicron variant has shaped up for the beginning of 2022 could weigh on multiple economic indicators, including employment, inflation, retail sales, etc. Despite some experts emphasising on the strength of the Australian economy, there seems to be caution and lack of a positive mood among the investors.

Rocky road ahead for the labour market

The labour market has seen an impeccable and swift recovery post the lifting of the delta variant induced lockdowns. The pressure now lies on wages, which should grow adequately for the RBA to consider an interest rate hike.

Wages growth in Australia has been a dismal ride, with the previous year being marked by inflation outpacing the rise in wages. This has landed the average Aussie in precarious circumstances where affordability remains a pressing issue. However, even as positive indications for wage growth develop for 2022, unprecedented lockdowns and supply chain issues could be a major hindrance for the same.

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Bottom Line

The chances of observing a nationwide lockdown, in the wake of the Omicron outbreak, seem to be quite low. However, it does not mean one can entirely rule out the possibility of mobility restrictions. While the whole world, including Australia, is slowly learning to live with the virus, the global economic performance is improving slowly. It would take some time before the full effects of the new strain unravel. Till then, Australia is expected to build upon its residual momentum from last year with its sound and active policymaking.

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