Economy to see upswing in 2022, but negative real wage growth and COVID-19 cast shadows
The revised forecasts presented in MYEFO, along with other economic data published today, suggests the economic recovery will gather momentum through 2022, with household consumption and business investment driving the upswing in growth. But there are still caveats to these predictions during an ongoing pandemic. And while today’s jobs figures showed an underlying strength in the labour market, the MYEFO forecasts also show declining real wages for 2021/22, and a barely positive outlook for 2022/23.
The Australian economy in effect hit the pause button during the second half of 2021 because of the delta related lockdowns that shut parts of the New South Wales, Victorian and ACT economies. But this should all change, Omicron permitting, in 2022.
Non-mining investment expenditure is expected to skyrocket next year – partly due to the Federal Government’s instant asset write off exemptions inducing businesses to bring forward investment spending and in part from catch-up expenditure which was unable to be spent during the most recent lockdowns.
Net imports are forecast to contribute about the same to the national economy as proposed in the May 2021 Budget, albeit with lower export growth and delayed imports. KPMG considers this element of the macroeconomic forecasts to be the most open to variation.
At first glance imports are likely to be higher given expected levels of business investment, while exports are also likely to softer given expected Omicron-related disruptions to world trade and forecasts commodity price falls.
In a speech today the RBA Governor noted that monetary stimulus through Quantitative Easing will be pared back during 2022, with bond purchases most likely tapering down from February to a phasing out by May. But this was dependent on two factors – firstly, the economy doesn’t experience another major setback, and secondly (and conversely), if there are better than expected employment and inflation results, then the QE program may cease quicker than current plans.
Today’s ABS Labour Force data shows an incredibly strong bounce back in employment during November, with the unemployment rate back down to 4.6 percent. This recovery in the labour market is ahead of both the RBA November’s Statement of Monetary Policy forecasts and today’s MYEFO, suggesting QE will stop sooner rather than later, and the forecast deficit in underlying cash balances for 2021/22 may be even lower than Treasury’s revised predictions.
But while there this underlying strength in the labour market, the MYEFO forecasts also show declining real wages for 2021/22, and a barely positive outlook for 2022/23.
Again, it is important to recognise the difficulty of preparing accurate forecasts in this (still) environment of a global pandemic. While the hope is that COVID-19 transforms itself into an endemic, and becomes something like the seasonal flu, until global vaccination rates lift universally the risk of another major concerning variation occurring remains high.
If this were to occur, all fiscal and monetary bets will be off, and we’ll have to revisit the game of COVID-19 snakes-and-ladders at next year’s Budget all over again.