The forecast is fair to middling, with a continuing sequence of shocks to the Australian economy and potentially profound consequences.
Are Australian policymakers now navigating a new economic order? It’s certainly true that the sequence of shocks hitting the Australian economy since the start of the current decade — COVID-19, the post-pandemic inflationary surge and major conflicts in Europe and the Middle East — have had some profound consequences. They include large shifts in the monetary and fiscal environments and a labour market transformed. At the same time, the economy also continues to be shaped by longer-standing trends, including population ageing and the (related) rise and rise of the non-market services sector. Finally, the impact of other much-discussed shifts, such as geo-economic fragmentation, is more ambiguous in the data.
Inflationary ups and downs
Starting with the most obvious changes, the case for a new economic order is probably strongest in terms of inflation and interest rates. Pre-pandemic, the annual rate of Consumer Price Index (CPI) inflation was just 1.8 per cent in the final quarter of 2019. Underlying inflation was an even softer 1.5 per cent. Headline inflation had been stuck below the bottom of the Reserve Bank of Australia’s target band for 18 out of 20 quarters from Q1:2015, including for the six consecutive quarters to Q4:2019. The RBA was under mounting pressure to push inflation up and had driven the cash rate target to a pre-pandemic low of 0.75 per cent.
In marked contrast, by the June quarter of this year, CPI inflation was 3.8 per cent and underlying inflation was 3.9 per cent. Moreover, by then, headline inflation had already been at or above the top of the target band for 13 consecutive quarters. According to forecasts in the RBA’s May 2024 Statement on Monetary Policy, it was expected to remain there until the end of 2025. Therefore, the RBA had increased the cash rate target to 4.35 per cent, its highest level in nominal terms since November 2011.
Budgetary blues
Likewise, the fiscal picture has also been reshaped. Budget 2019 — the final federal budget of the pre-pandemic era — had forecast a modest underlying cash balance surplus of 0.4 per cent of GDP for 2019–20. Then Treasurer Josh Frydenberg predicted the budget would thereafter remain in the black for at least a decade, with “sustained surpluses projected to exceed one per cent of GDP in the medium term”. Net debt was forecast to decline steadily before being eliminated altogether by 2029–30. The weighted average cost of borrowing across the forward estimates period was expected to be just 1.9 per cent.
Instead, COVID-19 meant that 2019–20 delivered a budget deficit of 4.3 per cent of GDP. That then ballooned out to 6.5 per cent of GDP in 2020–21. Granted, Treasurer Jim Chalmers was able to announce modest consecutive surpluses in 2022–23 and 2023–24. But as of Budget 2024, Frydenberg’s series of projected surpluses had been swapped for Chalmers’ sequence of deficits across the medium term. Likewise, the projected elimination of net debt had been replaced by a net debt-to-GDP ratio forecast to hit 21.9 per cent at the end of the forward estimates, before easing to 18.7 per cent by 2035. Borrowing costs were up, too. Assumed costs over the forward estimates had more than doubled to 4.2 per cent.
Jobs and trade
Another dramatic change has been the transformation of the labour market. At the end of 2019, the unemployment rate stood at five per cent, after having averaged 5.6 per cent since January 2015. The underemployment rate was 8.3 per cent. At the time of writing, and despite 425bp of cumulative monetary policy tightening, the unemployment rate was 4.2 per cent and the underemployment rate 6.3 per cent. In addition, vacancy rates remained well below their pre- pandemic averages even as advertised job numbers remained well above them.
At the same time, however, there have also been important elements of continuity. Despite some remarkable pandemic-driven swings in net overseas migration and population growth that contributed to the labour market’s transformation, Australia’s population has continued to grow — and to grow older. By December 2023, the estimated resident population was almost 27 million, up from 25.5 million in December 2019. Meanwhile, the median age had risen from 37.5 years in 2019 to 38.3 years in June 2023 and the old-age dependency ratio had climbed from 15.9 per cent to 17.1 per cent.
Continuity is also visible in the shifting structure of output and employment. A long-running theme has been the transition towards an economy where both production and jobs are dominated by services industries, thanks to a mix of technological innovation, relative productivity performance and international competition. More recently, that shift saw demographic change contribute to a rising role for non-market services in general, and for the care and support sector in particular. That shift has continued. Between Q4:2019 and Q1:2024, the share of non-market services in GDP rose by about one percentage point. More dramatically, the share of non-market services in employment jumped by more than three percentage points over the same period, led by an NDIS-assisted rise in jobs in healthcare and social assistance.
Finally, there are areas where the evidence remains relatively ambiguous, at least for now. Consider geo-economic fragmentation, where the data shows a mix of change and continuity. So, for example, in 2019, China accounted for 27.4 per cent of Australian trade and 34.2 per cent of exports.
By 2022, those shares had dropped to 24.9 per cent and 27.6 per cent, respectively, reflecting an ongoing pandemic-led collapse in services (tourism and education) exports, plus the impact of Chinese restrictions on some Australian goods exports, along with a fall in the value of iron ore exports.
By 2023, their respective shares had recovered somewhat and were back up at 26.8 per cent and 32.5 per cent. China stayed securely in the number-one spot throughout. Meanwhile, China’s share of total foreign investment in Australia eased slightly, slipping from two per cent in 2019 to 1.9 per cent in 2023, while the country’s share in the level of Australian investment abroad has fallen more significantly, dropping from 2.9 per cent to 1.4 per cent.
AICD chief economist Mark Thirlwell GAICD has focused on the international political economy at the Bank of England, JPMorgan, Austrade and Export Finance Australia.
This article first appeared under the headline ‘Buckle up for a bumpy ride’ in the September 2024 issue of Company Director magazine.
Latest news
Already a member?
Login to view this content