Are you keeping up with opinions of economists?
You’ve got to be as quick on your feet as Muhammad Ali used to be, to keep up with what economists are saying these days. In the first week of this month with a ceasefire still operating in the Iranian war, consensus was that recession was off the cards, Australia would survive the world’s biggest oil supply shock, and as conflict deescalated, prices would drop.
A week later the ceasefire was history, conflict throughout the Middle East was escalating and oil prices were rising.
So, does that mean a recession could now be a possibility?
Commonwealth Bank analysts say even as the Iranian war flares up again and there’s risk that this will again risk strangling oil tanker traffic through the Strait of Hormuz, the price of oil, now hovering around $US72 a barrel, could drop to $US60 by the end of the year – although “inflation remains a major threat”
Too right it does, which means the Bank’s answer to the question of whether there’ll be a recession -- even if somehow the oil price does drop -- should maybe be maybe.
For there’s no “maybe” about Australia’s inflation rate which officially is the second highest in the world -- in part due significantly to lavish government spending.
According to Trading Economics -- which provides data for 20m economic indicators from 196 countries including actual values, consensus figures and forecasts -- only Iceland has higher inflation than Australia.
Treasurer Jim Chalmers tries to excuse this situation by claiming Australia has faster economic growth than every G7 country except the US and faster job growth than all of them – although this hardly seems to be the point if Commonwealth Bank economists are right and it is inflation that is the “major threat” to our nation’s economic future.
Certainly, polls make it clear that Australians blame the Federal Government for the inflation that is making cost of living an increasing burden on their lives.
What lies ahead?
Shortly before hostilities in the Iranian war resumed and the cease fire still appeared to be holding, Deloitte Asccess Economics (DAE) issued a statement saying – without knowing what was about to happen in Iran – that Australia could expect to be in trouble economically this year because of “long-standing vulnerabilities finally catching up with the country”.
Deloitte predicted:
- The economy will “slow sharply” in coming months.
- GDP growth this financial year and next will slip below 2% for what would be the first back-to-back years of sub-2% growth since the end of the 2090-91 recession.
- Consumer spending will slow this year and next, contributing to the nation’s poorest growth outlook for decades.
- Slowing economic growth will be accompanied by on-going inflation of around 4% through 2026- 27 before falling to 2.6% in 2027-28.
- Real wage growth will go backwards in 2026-27 while slower economic growth will mean unemployment, now 4.4%, will average 4.9% next financial year, before peaking at 5% the following year.
The background story
As recent history exposes the wobbly structure of Australia’s economy, Treasurer Jim Chalmers’ insistence that everything is tickety-boo become less credible.
For too long, strong population growth has been masking weakening underlying productivity performance and the reality that the lifting of aggregate growth hasn’t bettered living standards. (In economics, aggregate growth refers to the overall increase in the size of an economy over time, typically measured by the total production of goods and services known as gross domestic product.)
Years of insufficient investment in housing, infrastructure, energy and the nation’s productive capacity have left the supply side of the economy struggling to meet demand.
It’s a situation worsened by uncertainty on what to do about this.
Deloitte expects the reserve Bank of Australia (RBA) to lift interest rates once more this year at its meeting next month most likely from 4.35% to 4.6% but financial markets believe it’s much more likely there’ll be a cut although they are saying here’s a 38% chance of a rise by February.
But Deloitte doesn’t doubt there will be a rate cut by September next year and a 50% chance of another one by Christmas.
WA has had the strongest state economy for years but is expected to be the slowest growing economy this financial year. Deloitte tips WA’s growth to slow to 0.7%, far behind NT’s 5.9%; growth in NSW, SA and Victoria are all predicted to fall to 1.3%, Queensland to 1.7%, Tasmania to 0.9% and the ACT to 1.6%.
The Iran war is forecast to be the factor with the most powerful continuing impact on Australia’s economy with financial markets “frothy” and heavily dependent on expected profits from the AI sector
A ray of sunshine in a generally dreary economic climate is the recent spending surge on data centres and technology within Australia as a possible prelude to increased productivity.
And business investment alone is forecast to grow by 6.9% this financial year and 5% in 2027-28.
But no happy ending in sight
Mortgage repayments on the average home loan recently climbed by $350 a month because of the RBA’s three interest rate increases this year and there’s been an ever-increasing rise in rents, insurance, groceries, electricity, and just about everything else.
Thus, the cost of living will continue to be the major blight on Australia’s economy with no indication the Federal Government has a cohesive plan to eliminate the problem.
All we’ve seen so far are poorly designed economic Band-Aids, the efficacy of which has been annulled from the outset by inflation, borrowing costs, volatile fu el and transport costs accompanied by weak confidence.
As to the questions we’ve raised, whatever problems newsletter readers may be having trying to keep up with what economists think is going on or should be going on, be assured Macks Advisory is having the same problem. For their opinions on the immediate economic future are like shifting desert sands.
The only thing we’re prepared to guarantee readers is uncertainty -- where there is every likelihood the going will be none too easy.
