For many of us lockdowns should soon be a thing of the past, we can get out to enjoy summer weather and kids can look forward to Christmas holidays with undeterred freedom – apart from what their parents impose on them. It would be nice to deliver equally good economic news, but the reality is we still have some pain to get through.
Even as lockdowns are lifted, we still have to deal with the consequences, including a rise in unemployment, which we now expect to increase by nearly 1 per cent and peak at 5.4 per cent by year end. Over the full year we expect a 3 per cent fall in consumption to 3.7 per cent on the back of lower spending across the services sector.
From a gross domestic product (GDP) perspective, we expect economic growth to contract 3.1 per cent in the three months to September 30, but followed by a 1.5 per cent rebound in the December quarter, and taking full year growth to 3.5 per cent. This is a far cry from the 5.7 per cent we had projected prior to the NSW COVID-19 delta variant outbreak.
The medium-term outlook suggests growth will get back on track
However, as Australia learns to live with the pandemic next year, we believe the medium-term outlook is still for a solid domestic-driven recovery, underpinned by low interest rates and fiscal stimulus already delivered to households.
With vaccinations on track for 80 per cent fully vaccinated by year end, the reopening this implies will likely see consumers become less obsessed with goods, and resume seeking out services, leading to better employment growth conditions.
In our outlook we assume vaccination levels will allow for international borders to reopen for unrestricted tourism in the second half of next year.
Inflation and the Reserve Bank of Australia (RBA)
Risks to inflation are tilted to the upside. Our base case remains unchanged that fiscal stimulus and a positive medium-term outlook imply that underlying inflation would be within the RBA’s target band of 2-3 per cent by mid-2023.
Therefore, we expect the RBA board to hike rates in the first half of 2023. The risk to our view is if inflation materialises earlier than expected, leading to an earlier rate hike.
However, the pandemic is far from over, and renewed global growth concerns from China pose material downside risk to our short and medium-term outlook.
The China syndrome
The world has become increasingly dependent on China’s contribution to growth. A slowdown in China’s activity due to the delta variant outbreak, along with regulatory clampdowns, the Evergrande debt crisis, and the recent power outages, have triggered a round of growth downgrades for China and also other economies in Asia.
We have moderated our economic growth outlook for China next year from 5.5 per cent to 4.9 per cent.
The spillover to other economies will mainly be through real, rather than financial channels. Economies that are trade or commodity-dependent are more vulnerable. Financial contagion is expected to be contained.
Home grown recovery
International economic threats aside, the recovery next year will be delivered by cashed up consumers, eager to resume a more normal life and spend on services largely unavailable over the past two years. A key component of the recovery will come from the government’s largesse in fighting the pandemic.
The response includes the COVID-19 disaster payment, the $200 income support payment, and the pandemic leave disaster payment. A total of over $9bn have been paid out across the September quarter, with over two million workers receiving the COVID-19 disaster payment. Payments will likely continue into the December quarter as NSW and Victoria will remain in lockdown in the early part of the quarter.
The pandemic response payments are similar to the additional income support payments made to households in 2020. Consequently, we expect only a modest drop in household disposable incomes in the September quarter, with the household savings ratio rising from 9.7 per cent to 13.6 per cent in the September quarter.
The total income support experience of households in 2021 is lower than 2020, largely because of less overall income support supplements and no early access to superannuation. However, compared to pre-pandemic levels, there is still more income support this year from Stage 2 tax cuts, low-to-middle income tax offsets, the pandemic response payments and the small permanent increase in JobSeeker.
As income support is reduced, households will again need to rely on their cash buffers built up during the lockdowns. Therefore, if health outcomes don’t further delay the recovery next year, households are still relatively well positioned to respond. Consequently, we pencil a 5.1 per cent rise in household consumption next year, leading to a solid 4.7 per cent rise in domestic demand. This is consistent with our view that the labour market will recover in 2022, after the initial turbulence through the reopening phase.
Any advice is general advice only that does not consider your individual situation. The content in this document is based on objective, verifiable facts and analysis performed by the Citi research team and is not in the interests of Citi’s research staff, the product issuer(s) or any other party.