Where are we with inflation and prospects of the Big R?
Analysts are claiming that although potential shoppers have stashed away some $450b during the pandemic, retailers face the worst economic outlook in 15 years with “soaring inflation” and consumers’ increasing reluctance to spend.
Investment bank equities analysts say companies involved in electronics and fashion – indeed any companies reliant on discretionary spending -- are most exposed as customers’ savings are whittled away by the rising cost-of-living, forecast to jump 13% next year.
Australians are worried, and justifiably so historically, when the US economy takes a turn for the worse, and it’s looking problematic now. The Federal Reserve bumped the underlying interest rate 75 basis points last month attempting to curb runaway annual inflation already nudging 9%, growth prospects appear to have faded on the Dow Jones, S&P 500, and Nasdaq, and consumer confidence is at its lowest since December 2020 as cost pressures mount.
But US Treasury Secretary Janet Yellen downplays assertions of analysts who say America will head towards an extended period of stagnation during the next 12 months. She expects the economy to slow, but declares “I don’t think a recession is at all inevitable”.
Australia’s perspective
Dr Philip Lowe, Governor of the Reserve Bank of Australia (RBA) agrees: “I don’t see a recession on the horizon here “. He points out that the unemployment rate is the lowest in Australia for 50 years, participation rate has never been higher, households -- despite high debt levels -- “have strong balance sheets”, and Australia is boosting its income with terms of trade that have never been better.
He appears to have scant regard for financial market predictions that the current cash rate of 1.35% -- increased 0.50% this month from 0.85% -- could be as high as 4% by this time next year. “To get there we’d have to raise rates by 50 points at the each of the [RBA’s] next six meetings and have a 75 basis points rise in the mix.”
Commonwealth Bank’s head of Australian economics Gareth Aird says, “whether or not we slide into a recession here ultimately resides with the policy approach of the RBA in the months ahead”.
Clearly, he seems more worried about the nation’s household debt than Dr Lowe.
Mr Aird said in a media statement earlier this month this debt is at a record high percentage of household income, which makes Australians among the most indebted people in the world.
“This means the corridor in which the RBA can move the cash rate from a stimulatory setting to a neutral one and then to a contractionary setting, is very narrow.”
Former treasurer Peter Costello, architect of the RBA’s independence, says he believes the bank missed what should have been the point to start putting a brake on the economy in the March quarter, and in consequence the risk of recession has heightened.
Issues from rate increases
Will the reported $450b Australians have horded during the pandemic be enough to enable millions of them who have home mortgages, to maintain them -- without wage increases – not only in consequence of this month’s cash rate hike of 0.50% to 1.35%, but to cope with a rate widely tipped to be 2.35% by December?
This would take people’s monthly repayments on a $500,000 mortgage from $2350 at the start of the year to $2973, while those with $750,000 to pay on their mortgage over the next 25 years would have had to find an extra $5026 in repayments this year.
Nonetheless there are economists arguing strongly that most mortgagees will be able to accommodate such repayments, and because the RBA expects the nation’s economy will grow by 4.25% this calendar year -- moderating to 2% in 2023 -- it can’t be reliably asserted by anyone at this stage that Australia is about to enter a recession, traditionally defined as a decline of gross domestic product (GDP) in two successive quarters.
Those who insist a recession can’t be a foregone conclusion say they are taking into account a resurgence of the Omicron variant of COVID-19, the Ukraine war, and continuing supply chain problems.
The National Australia Bank, more cautious than the RBA in predicting a 2.7% growth of the economy rather than $4.25% this year, is also nonetheless declaring a recession isn’t on the cards.
The NAB’s latest predictions go further: “Ultimately we see a soft landing [in the current situation] for Australia, with the impact of supply constraints unwinding while wage growth reaches a sustainable limit.
“GDP growth is expected to slow, but remain positive, and we don’t expect unemployment to rise materially above a level consistent with full employment”.
A South Australian perspective
Macks Advisory sources say there’s increased probability of default nationally for many industries as interest rates rise. For example, a high percentage of builders (some estimates put it as high as 80%) are suffering significant degrees of financial stress, and as we’ve said initially, there are retailers bemoaning “the worst economic outlook in more than a decade”, yet the South Australian Centre for Economic Studies reported this month the state’s economic recovery is set to continue.
The Centre says spending in SA has grown strongly this year because of robust household and public sector consumption as well as a rise in dwelling investment. The Centre’s director Jim Hancock predicts SA will grow above trend in the short term.
He expects reopening of the nation’s borders will facilitate immigration which, because this will relieve inflationary pressures generated from a very tight labour market, and help boost benefits long term from an increase in population.
Yet fear lingers that the RBA may have left its run too late to put an effective curb on inflation, that it’s belatedly embarked on a course of rate increases so high they will heighten risks of a recession.
So, right now, what’s the answer to the question we’ve posed: “Where are we with inflation and the big R?”
It seems that as far as inflation is concerned Australia can take a measure of comfort from the fact that our annual rate is around four times less than America’s – the country whose economy has a greater effect on ours than any other. As for the risk of a big R here, it’s probably quite a bit less than many folk fear.
While of course South Australians’ economic future depends to some extent on various global influences beyond our governments’ control, it may well be most influenced, and seen to be most influenced, by Dr Philip Lowe, between now and when he retires in September.
