Published: 19 January 2022
The year proved to be a very different one in 2021 compared to 2020. From a policy of zero-Covid to increasing vaccinations and opening back up, the environment for growth has been positive. The Australian economy as a result is expected to have grown by 5.1% in 2021, in line with other major economies. The Australian economy is just getting going but is likely to be impacted by supply chain disruption and an increase in Covid cases due to Omicron. The forecasts are for further growth of 4% this year.
The third-quarter GDP data showed a contraction of 1.9%, which was less than the forecast 2.7% fall but does highlight how bumpy the road to recovery will be. This fall was the result of various lockdowns in New South Wales and Victoria. The PMIs for manufacturing and services both showed faster expansion in November with an easing of these restrictions which had throttled growth in Q3.
One of the key metrics of wages started rising again and were up by 2.2% on the year at the last count. Statistics Australia noted that there had been a return to a regular pattern of growth after the disruptions of Covid. One positive element is that the private sector has been the main driver of growth. The unemployment rate has continued to fall to 4.6% with the participation rate above 66%.
Several surveys suggest that consumers see inflation rising to 4.8% with many therefore expecting higher prices this year. Business and consumer surveys paint a relatively positive if fragile picture, well above average levels, but prone to shocks from Covid cases and supply disruptions. The generally positive picture around commodities should provide some support for the Aussie dollar.
The main political hot potato has been around the handling of the Covid restrictions. Following the Covid zero policy, Australia has had an eventually successful vaccine rollout, with almost 805 of citizens now double jabbed. As a result, they moved to relax restrictions on entry to the country. Double-vaccinated natives and residents can now come and go freely.
This policy led to a dramatic standoff with World men’s tennis number one Novak Djokovic, who after a drawn-out saga was deported from the country. He was not vaccinated and whilst he had tested positive for Covid, he was judged by Immigration Minister Alex Hawke to pose a risk to public health and order. Former Australian Prime Minister Kevin Rudd called the situation a “political circus”. Many saw this as an effort by Prime Minister Scott Morrison to boost his support ahead of the upcoming election. The government handling of the Covid situation has been questioned and is under the spotlight at the moment as cases hit record levels.
Australia finds itself in a similar position to many economies, with inflation moving higher, and a central bank not sure quite how long this will last or whether they should act. At the moment, the Reserve Bank may feel they have some wiggle room with inflation currently only around 2.4% and the economy still getting going. The base rate is currently 0.1%, with the markets not pricing in any hikes through 2022.
The most recent minutes of the Reserve Bank of Australia’s November policy meeting shed no fresh light on the interest rate outlook. There was the familiar commitment to keeping policy supportive until wage and inflation criteria are met with the prospect of no upward move for interest rates before 2024.
If we see a continued strong recovery in 2022 and returning inflation pressures, we could see an earlier hike in rates, potentially in late 2022 or early 2023. At the moment, forecasts for inflation are only 2.9% in 2022, which is unlikely to force any movement. Over the course of this year, the focus will remain on the employment and inflation situation as we come out of the pandemic.
We had more volatility in the Aussie dollar at the end of last year, with a move from 1.86 down to 1.81 against the pound as restrictions were eased and the UK appeared to be facing the Omicron wave. With a smoother path through this for the UK and record cases in Australia, it seems like there may be more disruption in Oz. The central banks are also diverging with the Bank of England raising and the RBA not keen to. The forecast range is wide, but fewer forecasters see the current levels remaining through the course of 2022.
We had more volatility in the Aussie dollar at the end of last year, with a move from 1.86 down to 1.81 against the pound as restrictions were eased and the UK appeared to be facing the Omicron wave. With a smoother path through this for the UK and record cases in Australia, it seems like there may be more disruption in Oz. The central banks are also diverging with the Bank of England raising and the RBA not keen to. The forecast range is wide, but fewer forecasters see the current levels remaining through the course of 2022.
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The European Union has had a tough winter so far with Covid restrictions as a result of the Omicron wave. The Economy finished the year strongly with expectations of a positive year, though the ECB may have to take some action on rapidly increasing inflation.
The US has been working on many fronts, internationally with Russia and China, and domestically with an increased fiscal spending plan. The economy has been growing strongly, prompting action from the Fed, though masses of Covid cases may halt the recovery.
Recent data shows that the UK economy regained its pre-pandemic size at the end of November. Supply disruptions, falling unemployment and rising inflation will continue to be themes for the year, with the rate hike by the Bank of England unlikely to be the last.
New Zealand is now among a small number of countries with major travel restrictions in place and relatively low levels of Covid cases. With vaccinations now at high levels, there is a path to normalisation with the central bank raising rates as inflation picks up.
The increase in oil and commodity prices has benefitted the loonie somewhat. With the potential for further rises, we could see
further strength in the first part of the year, with inflation and interest rates likely to head higher.
