How the boost to the Australian economy could backfire in 2022


When that decision was made Australia was on the brink of disaster – but 18 months later it could be the thing that is blowing our economy up.

In life, there are few things more annoying to deal with than a car with a broken fuel gauge. Despite the methods of estimating how much fuel you have left, more often than not you have to guess until it finally goes out on the side of the road.

With this, the current Australian economy shares a lot in common.

We know the government put in a whole heap of fuel when it pledged $ 507 billion in stimulus at the start of the pandemic, but as to how much is actually left in the tank now, we can’t. what to make educated guesses.

In the more than 18 months since the start of the pandemic, educated guesses have been pretty much all economists and analysts could do a lot of the time.

At first, the consensus was that Australia would experience a level close to the “Great Depression” which would hit the economy and face a long road to recovery.

Then, when the economy reopened and it became clear that Australia was coping with the virus much better than almost everyone expected, the forecast was cautiously revised upwards.

Yet despite these upward revisions, the Australian economy once again surprised just about everyone with its resilience and the speed of its recovery.

While there are a number of different reasons for this, arguably the most important is the size of the Morrison government’s stimulus packages.

A big spending government

At over half a trillion dollars, the Morrison government’s stimulus pledge was the largest non-war spending pledge in Australian history.

In fact, compared to other countries for most of calendar year 2020, Australia spent almost double the UK GDP index and was only slightly behind the United States.

Both countries were hit extremely hard by the pandemic, but despite Australia’s global handling of the virus at the time, the huge stimulus continued.

To put the level of stimulus into perspective, it sits roughly along the same lines as the budget deficit in the final year of World War II, which Australia emerged from with one of the world’s weakest armed forces. most powerful in the world.

Yet despite the strength of the economic recovery from the pandemic, in terms of increased business productivity or new infrastructure, Australia does not have many long-term benefits to show for the hundreds of billions of people. dollars of new debt.

Inflation and interest rates

Earlier this week, Prime Minister Scott Morrison was well and truly in campaign mode, saying that under Labor, oil and electricity prices would rise and interest rates would “rise, more than they do. ‘would need it’.

In that single sentence, Mr Morrison touched on two sensitive points for Australian household budgets, the rising cost of living and the potential for rising interest rates.

Over the next few months, these two issues are expected to be hotly contested in the halls of parliament, as Australia prepares to go to the polls for the next federal election next year.

With the budget expecting zero wage growth after accounting for inflation until FY2024-2025, when it is only expected to gain 0.25%, consumer prices are rising faster than the Treasury forecast and interest rate hikes could present a significant challenge. to the economy.

A king’s ransom in savings, but will they be spent?

By the end of the year, Australian households are estimated to have saved around $ 200 billion since the start of the pandemic.

Although this is a huge amount of money, it is only a fraction of the more than $ 1.2 trillion in bank deposits held by households.

There is a popular narrative that a large chunk of these savings will be spent in a huge coup in consumer spending, as the economy finally reopens to what is hoped to be post-pandemic Australia.

But whether or not that happens is quite another thing.

In the United States, the level of household savings since the start of the pandemic is over $ 2 trillion, but despite holding an unprecedented amount of money, the attitude of Americans towards purchases major collapsed to its lowest level in almost 40 years.

This is undoubtedly due to the impact of rising inflation, with rising fuel, housing and food prices particularly affecting American households.

As a result, US consumer confidence is now worse off than during the dark days of the initial lockdowns early last year.

It is not yet clear whether the US experience of high inflation is a glimpse of what Australia will face, but it is already raising eyebrows in parliament and in boardrooms across the country.

A misty crystal ball

It is unclear how much inflation and interest rates will weigh on the economy in 2022 and beyond, as pundits and central bankers continue to debate which path inflation will eventually take.

The truth is, Australia and the world are in unexplored economic waters, never before has so much money been thrown into the global economy with so little consideration for value for money or the potential long-term consequences. term.

In late 2020 and into 2021, Australia’s economy surprised just about everyone with its resilience, leaving many analysts now quite optimistic about its outlook for the future.

In the end, the country’s economy fuel gauge remains broken and how many kilometers we have left in the tank remains a mystery, we may have more than enough to see us through 2022 or the economy. might spit out much sooner than many of us realize. .

Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter


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