Australia’s economic outlook
2.1
As the Australian economy continues its COVID-19 recovery, the committee examined the RBA’s view of the economic outlook going forward. According to the Governor, the outlook overall is ‘uncertain, but still positive’ with the RBA expecting growth to be ‘reasonably good next year’. The economy has remained resilient, evident in its growth of 0.9 per cent in the June 2022 quarter and by 3.6 per cent over the year—which are good outcomes and ‘better than those being recorded in most other economies’.
2.2
Since the RBA’s last appearance before the previous committee in February 2022, there have been substantial changes to Australia’s economic outlook, with the Governor highlighting three areas that are discussed in this report: the decline in unemployment, the surge in inflation, and the earlier and sharper than expected increase in interest rates.
Global uncertainty
2.3
The committee sought the RBA’s observations on current and future risks to the global economy. The Governor identified uncertainties for Australia as largely originating in the global economy, in particular from: the United States, Europe, China, and the war in Ukraine. If the global situation continues to deteriorate from the RBA’s current forecasts, it will make it difficult for Australia to bring down inflation and grow its economy.
United States
2.4
The Governor told the committee that wide-ranging monetary and fiscal interventions used to support international economies in the face of the COVID-19 pandemic had seen high levels of inflation emerge, most notably in the United States (US). This is of grave concern considering that ‘if the US economy slows that will inevitably affect the rest of the world’.
2.5
In response, the US Federal Reserve is now attempting to stop rising inflation expectations from evolving into higher wages and prices. Yet, unlike the current situation in Australia, the Governor noted that US inflation is largely driven by wages growth.
War in Ukraine
2.6
The RBA’s Financial Stability Review in April 2022 considered the Russian invasion of Ukraine to be a considerable ‘source of uncertainty’, accentuating existing risks in the global financial system and creating others, while increasing market volatility.
2.7
Expanding on this to the committee, the RBA said that the invasion had disrupted energy markets around the world, leading to large increases in retail energy prices in many countries. Russia’s actions had also contributed to rising commodity prices, for example by limiting the global supply of wheat.
Europe
2.8
The Governor explained that the broad issue in Europe is the impact of inflation on real household incomes. With most European countries facing close to 10 per cent inflation, wages growth of between 3 and 5 per cent and high energy prices, household spending power has ‘diminished’, creating high levels of uncertainty for investors, and posing a ‘clear and present danger for the European economy’.
China
2.9
The RBA told the committee that weakness in China’s economy is linked to Beijing’s ongoing pursuit of a COVID-zero policy, resulting in continued lockdowns in cities. Lockdowns are interrupting production capability and reducing the incentive for Chinese citizens to spend. China’s housing sector is also weak, with the collapse of large property developers preventing households from committing to purchasing residential property.