Australia’s economic growth is likely to weaken - perhaps a lot - as the things that supported the growth surge and underpinned the rampant lift in inflation are not only coming to an end, but are being reversed.
This is not to say Australia is heading for recession – far from it. But a period where GDP eases back to 1.5 to 2.5 per cent, rather than the 2.75 to 3.5 per cent prevailing now, seems assured.
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Importantly, super easy monetary policy has ended. Just a few months ago, the official cash rate was 0.1 per cent, the Reserve Bank was ‘printing’ billions of dollars a month and was lending the banks hundreds of billions of dollars at basically no interest.
No wonder spending and inflation took off.
We now have the prospect of official rates hitting 2 per cent or more by the end of 2022, there is no more money printing and the bank’s free money has ended.
Monetary policy has, and is being, tightened.
It is early days, to be sure, but the election of the Albanese Government is likely to see a return to responsible management of the budget – tighter fiscal policy in other words.
We are set to see an end to the reckless and wasteful spending and absurd tax cuts that were characteristic of the Morrison government.
On current policies, there are over $220 billion of budget deficits over the next four years and government debt is poised to hit a staggering $1.2 trillion. That is 1.2 times a thousand times a billion dollars.
This is a problem that must be addressed.
Instead of the Government borrowing at record levels and spending like the proverbial drunken sailors, Treasurer Jim Chalmers and Finance Minister Kay Gallagher have already indicated the task of fixing the trashed budget position they inherited will require some sizable fiscal tightening.
In simple terms, this means the Government side of the economy will be not adding much to bottomline GDP growth and it could or should take some growth off GDP if the tightening is substantial.
'Wealth effect' fading
A more fickle issue for the economic outlook is the fading of the so-called wealth effect for the household sector.
In the past two years or so, householders have been reaping a massive lift in their wealth as the house price boom saw staggering price gains of around 30 per cent and the stock market rebounded from the lows of early 2020.
Wealth grew rapidly to register a series of record highs. The effect of this wealth surge underpinned what was rapid and above-average growth in household consumption spending.
There is a huge volume of research that shows a strong positive link between the change in wealth and spending.
There is evidence that the growth in wealth is slowing. House prices are stalling, even falling in Sydney and Melbourne, and the stock market is choppy as the world comes to terms with tighter monetary policy, including higher interest rates.
If, as seems likely, the growth in wealth stalls for a year or two, the household sector will scale back the growth in its spending, which in turn will dampen bottomline GDP growth.
Then there is the effect of the opening of the international borders. Somewhat perversely, this may prove to be a negative for the economy as Australians travelling overseas spend more than foreign tourists who come to Australia.
As many folk jump on planes to holiday overseas, overall spending in the local economy is likely to be further constrained.
Commodity boom waning
And finally, it appears the commodity price boom - which prevented the last couple of Morrison government budgets from looking even more precarious - is topping out.
At this stage, the commodities markets are still strong but slower global growth, a slow but steady resolution of supply chain constraints, and a ramping up of output will likely see the commodity price cycle trend lower over the medium term.
For Australia, this will unwind some of the stellar national income growth that the prior price boom delivered. It also means the international trade surpluses will shrink and the stimulus from the commodity price boom will soon become a negative.
All of this sounds a bit gloomy. And if things move more rapidly, there could be a problem for the economy in 2023. But, for now, the trends noted above are quite orderly and are not a ‘crash’ type event that would cause greater concern for the economic outlook.
That said, get set for a period of more subdued growth as the policy and global economic cycles turn down a notch or two and the Government, in particular, starts to manage the economy in a responsible manner.