Even though economic indicators are encouraging, the turbulence of the past year might be a sign of more volatility to come, writes AICD chief economist Mark Thirlwell GAICD.

    One year ago, the July 2022 edition of this column described a daunting economic environment. 

    On the home front, inflation was accelerating, the RBA had commenced its first monetary policy tightening cycle in more than a decade, households were suffering from rising living costs, and businesses were struggling with severe labour and skills shortages. 

    Meanwhile, the international economic environment was mired in a polycrisis — a series of overlapping, interlocking and mutually reinforcing crises. 

    The latter included persistent supply and demand-side dislocations created by the pandemic, the geopolitical, geo-economic and economic disruptions triggered by Russia’s February 2022 invasion of Ukraine (including major shocks to global food and energy prices) and an unfolding stagflationary threat comprising multi-decade high inflation rates, falling global growth forecasts and the most internationally synchronised tightening of monetary policy seen this century. 

    One year on, how much has changed? Start with the Australian economy and the inflation-monetary policy nexus. 

    After climbing from an annual rate of 5.1 per cent in the first quarter of 2022 to 6.1 per cent in the June quarter and 7.3 per cent in the September quarter, consumer price inflation peaked at 7.8 per cent in the December quarter of last year. 

    It then fell back to seven per cent in the first quarter of this year and — according to the latest (May 2023) set of RBA forecasts — is expected to end 2023 at 4.5 per cent. 

    The good news, then, is that we’ve transitioned from a period of accelerating inflation to a process of disinflation. 

    The not-so-good news is that the RBA nevertheless remains concerned about persistent price pressures, judging that inflation will not be back within its target band until 2025. 

    Moreover, Martin Place’s policy response involved delivering the most brutal sequence of rate increases to be seen in Australia’s inflation-targeting era.
    Since first hiking in May last year, the RBA has delivered a cumulative 400bp of rate increases. 

    Most of these were conveyed in back-to-back meetings, with Martin Place taking a brief pause for breath in April. 

    While the tightening cycle looked to be approaching its end following the June 2023 rate hike, the RBA was still signalling after the meeting that it might not be quite done, even as the cumulative impact of those past rate moves was yet to be felt in full. 

    Last year’s cost of living squeeze has also intensified, with surging mortgage interest payments and accelerating rent increases adding to the burden of higher prices for health, food and energy. 

    The March quarter 2023 jump of 9.6 per cent year-on-year in the employee living cost index was the highest since that series began, propelled upwards by a 78.9 per cent leap in mortgage interest charges. 

    Granted, an important countervailing force here is that households have been able to rely on a resilient labour market. 

    Although the unemployment rate has edged up from the half century low of 3.4 per cent it reached in October 2022, at just 3.7 per cent as of April this year, it is little changed from the 3.6 per cent prevailing at the end of the June quarter 2022. 

    The net impact of these conflicting pressures on household spending outcomes will go a long way in deciding whether Australia tips into recession over the year ahead. 

    Meanwhile, the slight easing in labour market conditions plus a strong resumption in the rate of net overseas migration has provided some modest relief to the labour and skills shortages. 

    Zoom out to the global level, and several of the elements contributing to last year’s polycrisis have faded. 

    The pandemic-created stress on global supply chains has mostly been unwound and aided by China’s reopening, and key bottlenecks have eased. 

    Energy and food prices have retreated from their post-invasion highs with global food prices dropping to their lowest level in two years in May.

    Partly as a result, inflationary pressures have also diminished. For example, consumer price inflation across the OECD had slowed to 7.7 per cent by March this year after peaking at almost 11 per cent in October 2022. 

    Polycrisis persists 

    Other elements of the polycrisis remain in place, however. The Ukraine war continues, as does the accompanying geopolitical recession. High interest rates still test the international financial system, most recently in the form of the March 2023 US regional banking crisis and the subsequent rescue of Switzerland’s Credit Suisse. 

    The implications for the world economy of fraying international economic ties — the preferred new term is “geo-economic fragmentation” — still worry international policymakers at the IMF and elsewhere.

    Indeed, there is a growing case to be made that last year’s polycrisis should be seen as a symptom of a more long-running period of transition or transformation in the international economic environment. 

    That is, we might now be in the midst of a kind of “Liminal Age” for the world economy, caught in a period of transition between one set of geopolitical and geo-economic arrangements, and another. 

    Certainly, it is easy enough to identify several of the “great transformations” currently underway. 

    There is the move from a Western (US) led global order to a more contested geopolitical landscape, plus the closely related shift from hyper-globalisation to a system of “friendshoring”, industry policy and national security-led trade and investment frameworks. 

    Then there is the ongoing global demographic transition that, as well as rapid population ageing in the rich world, last year brought the first decline in China’s population in 60 years and earlier this year saw India become the world’s most populous country. 

    And, of course, there is the unfolding energy transition from fossil fuels to renewable energy sources. 

    There are also more speculative transitions in prospect, including the potential for the successful exploitation of generative AI and related technological developments to unleash a new wave of industrial transformation and productivity growth — perhaps alongside some accompanying labour market carnage. If this Liminal Age thesis proves to be correct, then the turbulence of the past year might be a sign of more volatility to come.

    This article first appeared under the headline ‘Sitting in Limbo’ in the July 2023 issue of Company Director magazine.

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