As the Australian economy enters a period of necessary deceleration, experts warn of the potential risks of an uncontrolled downturn.
While the situation remains manageable, there is growing apprehension that the slowdown could worsen unless effectively addressed.
This sense of unease was recently compounded by reports of liquidity issues in select US and European banks, which have contributed to an already uncertain global economic outlook. In response, the US Federal Reserve and the European Central Bank have opted to raise interest rates in an attempt to mitigate inflation and sustain economic growth. However, these measures have also created new hurdles for the global economy, potentially complicating recovery efforts.
Despite the challenges, some sectors in Australia are still able to thrive amidst the broader economic slowdown. Industries such as technology, healthcare, and renewable energy have managed to sustain growth by capitalising on rising demand and pioneering new innovations. With their resilience and potential for high returns, these sectors remain attractive prospects for investors.
In a recent March economic update, CreditorWatch’s Chief Economist, Anneke Thompson, delves into Australia’s economy and business landscape, covering the latest retail and employment figures and the ongoing impact of inflation and global uncertainty.
Thompson’s report provides insight into the current economic indicators, including the slight increase in retail figures seen in February. Despite this positive trend, consumers remain cautious due to concerns about inflation and the effect of rising interest rates.
The report also examines the employment figures, indicating a slight increase in the number of jobs created in recent months. However, COVID-19 and the resulting lockdowns continue to pose challenges for businesses, particularly in sectors such as hospitality and tourism.
Thompson’s report also sheds light on the ongoing impact of inflation on the economy, with rising prices for goods and services putting pressure on businesses and consumers alike. Moreover, the ongoing uncertainty surrounding global economic conditions continues to create a challenging environment for Australian businesses.
The US is currently experiencing a persistent inflationary trend that appears to be more entrenched than initially anticipated. Despite this, the US consumer continues to spend, and the labour market remains robust. However, if job losses extend beyond the technology sector, the deceleration of economic growth could accelerate, with a potential risk of a recession.
“Fortunately, there is positive news for the Australian banking sector, which is highly secure and well-regulated. While global economic challenges could tighten the supply of credit, the deposits held by Australian banks are largely protected, Anneke Thompson notes.
Inflation eases, but some categories show elevated price increases
According to Anneke Thompson, inflation in Australia has eased somewhat, with the inflation rate in February reduced to 6.8 per cent from 7.4 per cent in January and 8.4 per cent in December. However, certain categories such as rent, some food categories, and electricity still show elevated price increases. Thompson believes that rents are unlikely to reduce anytime soon due to supply-side issues. She also notes that electricity price increases will remain high until at least the middle of the year, and possibly beyond that.
Employment past the peak
Regarding employment, Australia’s unemployment rate remains near record low levels at 3.5 per cent, although any further falls are highly unlikely. Job vacancies over the three months to February 2023 were down 1.5 per cent, indicating that we are well past the peak in the employment market.
Aussies tightening their belts
Thompson observes that steeply rising home loan repayments, rents, food, electricity, and other costs are now showing through in retail trade figures. Australians are purchasing less, particularly on household and discretionary items.
Business and consumer sentiment
Consumer sentiment remains near recessionary levels and has been this low for some time, but business confidence is still reasonably strong. Thompson predicts that business conditions will change over the next six months as lower consumer spending flows through the economy and record levels of construction activity start to tail off towards the end of the year.
Interest rates close to peak
The RBA appears to be close to the peak of the monetary policy tightening cycle, but Thompson notes that they will still be wary of tight labour market conditions and strong business sentiment. Inflation and retail trade are moving in the direction that the RBA wants them to, which is good news for borrowers.
Global conditions
Finally, Thompson cautions that uncertainty in global liquidity markets is now a real threat to economic stability. While Australian banks are considered among the safest in the world, some smaller regional banks in the USA with large commercial property loan books are being sounded out as the next big risk. However, slowing credit does act as a further handbrake on inflation and may actually help central banks in their war against inflation.
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