No surprises today that the Reserve Bank of Australia increased the cash rate to 2.85 per cent in an effort to crush price growth. In the September quarter, inflation came in at 7.3 per cent, the highest rate in 30 years. Price growth is not occurring at the same rate in every city. Perth prices actually went backwards in the September quarter as a result of a rebate on electricity bills during the time. In Adelaide, price growth is strongest, due to soaring energy prices. Across Australia, construction costs continue to be problematic, a flow on to housing supply that is already being felt by renters and will extend to home buyers over coming years.
How quickly conditions change to the negative is now showing up in the UK. Like Australia, boom time conditions followed the end of the pandemic. But then prices began soaring off the back of higher demand but more particularly, conditions that are not impacted by rate rises such as the war in Ukraine and blocked supply chains. The cash rate in the UK is now 2.25 per cent, inflation is at 8.8 per cent. Interest rate rises have yet to kill off inflation, but have killed the economy. The Bank of England has stated that the economy is now in recession.
Australia has moved more quickly upwards with rate rises and our inflation is a bit lower but recession remains a risk. Already, companies that were on hiring sprees less than 12 months ago are cutting staff. Government debt is at a record high and there is less to help those most adversely affected. The US dollar continues to soar, increasing the costs of exports. It is easy to go down a deep dark hole when considering the outlook. Can Australia avoid a recession?
Most positively, Australia has been remarkably successful at avoiding recessions. Prior to the pandemic driven recession, Australia did not have a recession in 30 years. We were even able to avoid the “Great Recession” between 2007 and 2009, mainly due to the iron ore boom that happened at the same time. Added to this has been population growth that has been above many other countries, close links to China, strong growth in our services economy and a boom in construction..
Some of what has led to Australia being more recession proof than other countries hasn’t really changed. Iron ore is now being backed by soaring demand for green energy minerals. Australia remains desirable as a place to move to with migration capped only by how many people we allow to move here, rather than a shortage of demand.
Our reliance on China for economic growth is more complicated. We are still closely linked to China but COVID lockdowns are still a reality in that country. Next year, economic growth is expected to be just 2.8 per cent in China, lower than what was experienced last year in Australia and certainly a lot slower than what China has been experiencing longer term. Furthermore, our relationship with China is currently far more complex than it has been for many years.
This relationship with China then has flow on impacts to our services sector, particularly education which remains one of our top exports. The number of overseas students from China is now at its lowest level in a decade. More positively, the number of students from India is now higher than those from China in South Australia, Western Australia and Tasmania.
Finally, we are going to see less economic growth from construction over the next 12 months. Dwelling approvals are now down 10 per cent from last year and many projects have been delayed due to challenges in the construction sector. While this has a flow on to economic growth, it also impacts rents and prices. It is getting harder to find a home to buy or rent and this is not going to change any time soon.
It is too early to tell whether Australia can avoid a recession but if China bounces back, migration levels push upwards and our education sector starts to return to pre-pandemic conditions, we may once again be a global outlier. For now however, cost of living increases look like being a challenge for most of us.
