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Australia’s economic trajectory shows a precarious balance between indicators forecasting a dip in activity and those predicting sustained growth. This period is marked by pronounced inflation concerns and indicators of economic slowdown, counterbalanced by robust employment numbers and strong export results.
Inflation has been the leading concern within this quarter. Latest Consumer Price Index (CPI) figures offer a glimmer of optimism, with inflation easing from 6.8% in April to 5.6% in May, the lowest since April 2022. Yet when we strip away volatile items such as fresh produce and petrol from the CPI Index, the reduction is marginal, moving from 6.5% in April to 6.4% in May. These figures are fueling speculation among economists that further interest rate rises are imminent.
In a scenario where volatile factors are excluded, the core inflation level is forecasted not to fall within the Reserve Bank’s target band of 2% to 3% until potentially as late as 2026.
Rising interest rates are already having their effect on the spending habits of Australians. Discretionary spending has witnessed a downturn with consumers opting for austerity. Notable impacts can be seen in sectors like short-term rentals, with platforms such as Booking.com.au witnessing a sharp decrease in bookings.
Major retailers like Best and Less, Adairs, Domino’s Pizza, and the Retail Food Group have reported a significant slowdown in retail trading figures, highlighting that retail spending has taken a substantial hit.
The business landscape saw a worrying rise in company failures, reaching 650 in May as reported by the Australian Securities & Investments Commission (ASIC). This is a considerable increase of 58% from April, and 50% higher than the same period last year.
Non-bank lenders, known for catering to higher-risk clients, are starting to witness a rise in defaults. However, many homebuyers seem to be leveraging their existing savings to absorb the financial strain of climbing mortgage interest rates.
Despite the escalating economic concerns, the labour market remains robust. Data from May shows that employment has risen to over 14 million people nationwide, while the unemployment rate remains steady at 3.5%.
Nevertheless, inflationary pressures are resulting in higher wages, raising concerns about the possibility of stagflation – a condition where wages and prices continue to rise amidst an economic recession. Recent wage increase announcements from companies like Optus and Visy underscore this trend.
The property market has maintained its strength, although these figures may be skewed by high one-off prices achieved for individual properties. On the brighter side, Australia continues to enjoy record-high prices for exports such as iron ore, coal, and wheat.
Interest rates are steadily increasing on the global stage. The Bank of England upped its interest rates by 0.5% in June, and more hikes are anticipated in the United States. Cash rates in New Zealand, Canada, the UK, and the US are now near or over 5%, while Australia lags with a cash rate of 4.1%.
The implication is clear – Australia is likely to face higher interest rates regardless of the next quarterly inflation figures. If local rates don’t align with our key trading partners, we risk a depreciating Australian dollar. This, in turn, would push up import prices, fueling inflation and potentially negating the recent efforts of the RBA to keep it in check.
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