Australia’s economic outlook: it’s not all doom and gloom – Nicki Hutley

Experienced economist Nicki Hutley says there’s room for cautious optimism about Australia’s economic outlook and how it compares with the global economic outlook. 

Hutley’s prognosis? Australia has several challenges in store – mostly known, some unknown – that will test its economic resilience. Still, the country is faring well compared to some of its major global partners.

Ever since the start of the COVID-19 pandemic, economists have become a lot more comfortable with the idea of scenario planning, according to Hutley. They have always done risk management to some degree, but they’re getting better at doing it. It’s the role of economists to help people navigate the challenges of the future and identify where the risks lie. 

What we’re seeing at present is a ‘confluence of calamities’, but they’re having a lesser impact on Australia than other countries. 

The world is starting to normalise with the number of COVID cases going down in 2022. But it was harder to predict at the beginning of the year that war would break out in Eastern Europe, provoking such fallout. Geopolitical instability is causing an energy crisis with profound consequences for Europe much more so than Australia.    

Australia has experienced a massive supply-demand imbalance throughout the pandemic period, with workforces and supply chains disrupted while the government commits to huge levels of expenditure.

The ‘inflation genie is now out of the bottle’ but inflation figures in Australia and its major trading partners are low relative to some other economies throughout the world. In the face of rising inflation, we’re seeing central banks hiking interest rates. Higher rates won’t put a stop to COVID or end the war in Ukraine, Hutley says. But they will slow down demand to meet the constraints Australia is experiencing on the supply side. 

The Australian economy is currently doing well, with 3.5 per cent growth over the year to June 2022, Hutley says. Its performance to date has been driven by strong consumer demand. 

Consumer confidence is currently so low that it’s consistent with the country experiencing a major economic dislocation. Consumer sentiment is likely to drop further once the impact of rising interest rates on home mortgages starts to bite. Interest rates are still at historically low levels, but what we’ve seen in recent months is a very sharp rate increase that will affect many households, particularly those in the low-income bracket. 

Worryingly, the Australian public clearly anticipate economic conditions will get worse before they get better. 

Australia is better placed than many other countries around the world right now, Hutley explains. We don’t have the energy price shocks Europe is experiencing or the inflation figures that the US and the UK have.

Among the ‘known unknowns’ that will impact Australia’s economy in the year ahead are possible further COVID outbreaks and geopolitical uncertainty. The war in the Ukraine and tension between China and Taiwan will clearly be flashpoints we need to watch. Among the ‘known knowns’ on the horizon is the prospect of further interest rate rises.

The biggest concern will always be ‘Black Swan’ events: unpredictable factors with severe consequences. Climate change risk is the most prominent example of this type of impact. The digital revolution will enable great advances in productivity but, at the same time, we have reason to be worried about cyber security.  

Despite tough global economic conditions not everything is doom and gloom. On a positive note, the US recently passed the Inflation Reduction Act 2022, much of which relates to climate change. There are huge credits and incentives contained in the Act that relate to decarbonisation initiatives. 

Hutley says there is now an arms race to decarbonise the world. It’s not only necessary, it will bring about enormous economic opportunities for Australia and globally.