The Australian economy remains afloat – but there are choppy waters ahead | Greg Jericho

TThe OECD has released its latest outlook and, as with recent reports from the International Monetary Fund, the Reserve Bank of Australia and the October Budget, Australia is predicted to be on a very thin line for the next several years.

First the good news: The Organization for Economic Co-operation and Development expects the Australian economy to grow next year in line with all other major economies. Expected growth of 1.9% is better than Japan, Canada, France, the United States and Italy, and unlike Germany and the UK, we are not going backwards:

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Things will get a bit more difficult in 2024, but our projected growth of 1.6% is still above the G7 economies and far outperforming the UK, which is expected to be completely destroyed in the next two years.

So that’s the good news. The bad news? Are we really trying to say that 1.9% and 1.6% annual growth is good? Hey boy.

If we were to talk about such low growth at any other time in the past 70 years, you’d be asking “so we’re going to have a recession?”.

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Now I’m not saying we’re about to have a recession, but we should keep in mind that if we’re outperforming most other economies, we’ve got to hit a very low bar and we’re in for a tough time to go.

In retrospect, the frictions we now face were unavoidable. After surviving a heart attack, you’re not shocked that your 5km run times are a little slower, so we shouldn’t be surprised to see our economy dealing with a few issues.

However, no one had foreseen Russia’s illegal invasion of Ukraine.

To get a sense of its impact – and also to understand why mining companies are making a fool of themselves – the OECD estimates that the level of OECD GDP spent on energy consumption is now higher than during the oil crisis in the 1970s. seventy and eighty:

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Gas companies are the big “winners” – the share of GDP spent on gas went from 1.8% to 3.7%. Spending on coal also soared – from 0.6% of OECD GDP to 1.5%.

Call me crazy, but that sounds like a lot of luck.

That has greatly exacerbated inflation.

Australia is not alone in seeing prices rise rapidly. And, as with GDP growth forecasts, we are doing well here compared to other countries:

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An interesting note from the report is the estimate that both demand factors and supply issues are driving current inflation growth in Australia:

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There are some caveats to this estimate – the OECD notes that it is rather difficult to discern the causes and that “the proportion of inflation classified as ambiguous has risen somewhat in Australia, Canada, the United Kingdom and the United States. States, but not in other countries.”

But it does explain one reason why the RBA raised rates despite wages lagging far behind inflation.

Demand is not driven by wages, but by the ability to spend stimulus money now that lockdowns have ended. And one area that we’ve really seen is in the transportation and dining out service sectors:

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This experience is somewhat replicated around the world, and so central banks around the world are raising interest rates.

Over the past six months, more than half of developed economies have raised interest rates by at least 1.5 percentage points – a first in more than 40 years:

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But the OECD has identified one problem: when all countries raise tariffs, the impact on GDP is greater.

For an advanced mid-sized economy like Australia, the effect of tight monetary policy over a three-year period reduces GDP by about 0.9% if we act essentially alone. But in the current case where all countries raise rates, the expected three-year drop in GDP is about 1.3%:

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Worse, however, is that while the impact on economic growth is increased when all countries raise rates together, the impact is of lowering inflation reduced:

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The reason is exchange rates. For example, if Australia raised interest rates while the US did not, our currency would strengthen and imported goods from the US would become cheaper – thus reducing inflation.

But when everyone raises rates, that impact doesn’t occur.

And one factor that puts Australia at greater risk of a more than average slowdown is that Australia has more floating rate mortgages than other countries:

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This means that increased rates not only affect the level of new loans taken out, but also the payments of existing mortgage holders, more than in other countries.

It creates a worrying situation where all economies are racing to raise rates, not only to slow inflation, but because other countries are doing the same. This, in turn, hurts economic growth even more and reduces the impact on inflation.

Worse, however, as the OECD points out, “the combined shock of the additional rise in interest rates is greater in smaller, more open economies” – including Australia – so we may be swamped by the waves from overseas.

The OECD currently sees our economy growing in line with other countries, but its report also points to the major risks ahead.

This article was amended on 24 November 2022 to correct a reference to the share of coal spending from 1.5% of global GDP to 1.5% of OECD GDP and a reference to the level of global GDP spent on energy use to OECD energy use.

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