After showing a stronger-than-expected recovery, Australia’s economy has been caught in a slowdown, interrupted by the recent resurgence of the new COVID-19 variant. Concerns regarding a possible slowdown in the economic revival of the country have resurfaced as lockdown restrictions come into place because of the rapid increase in cases.
The Reserve Bank of Australia’s recent policy guidelines have hinted at a possible rate tightening in the future. The central bank unexpectedly announced that it would reduce its weekly bond-buying to AU$4 billion in September. Given the current lockdown restrictions in place, a few market experts anticipate that the move would be pushed further ahead.
To further blow some steam off, housing prices have taken a breather across major cities, including the uber-expensive NSW capital, Sydney. Slackened demand for housing and lockdown restrictions have led to the unlikely turnaround of housing prices in the city, which have fallen recently. However, CoreLogic data suggests that overall, the annual housing prices have risen at the rate of 16.1 per cent, a rate unseen in over 17 years.
Following these recent developments, the economy has become a mixed bag of cooling prices and dampening growth. However, crucial policy changes in the coming months could take the economy on a different course.
The dollar rally and other aspects
After RBA’s decision to reduce bond-buying came out, the Australian dollar rallied 0.6 per cent to US$ 0.7404. The Reserve Bank based its decision on an optimistic view of economic review post the current lockdown.
RBA Governor Phillip Lowe recently stated that the economy would emerge out of any slowdowns that it brushes past during the lockdown once the restrictions are removed. Governor Phillip’s optimistic view was based on Australia’s better-than-expected economic recovery from the previous recession.
In this context, the central bank expects GDP to grow by 4 per cent in 2022, higher than the previously expected rate of 3.5 per cent. Moreover, unemployment could drop to 4 per cent by the end of 2023, a figure close to full employment.
Projections for the GDP growth in the coming quarters are not as hopeful as economists expect a contraction in the September quarter. Given this, RBA might have to amp up the stimulus in the coming months.
Is lockdown wreckage posing challenges again?
The damages caused by past lockdowns continue to manifest themselves as their impact has still not worn off completely. Experts fear that the economy might see similar wreckage in the coming months when the economy struggles to resurface from another lockdown.
Growing fears of an impending recession that could handicap the Australian markets, yet again, have gripped the minds of experts largely backed by the evident slowdown in major indices. The Australian Bureau of Statistics, in its June retail sales report, confirmed that retail trade fell by 1.8 per cent during the month. This came as quite a shock as lesser decline was expected in the sector. Food retailing was the only sector that showed an uptick in sales owing to a larger population eating at home instead of going out.
Additionally, with commercial activity coming to a standstill, larger losses can be expected in the coming months, reminiscent of the turmoil observed last year. This would directly hit the GDP and has experts bracing for a huge decline in the economic indicator.
If the GDP decline occurs in the coming quarters and is followed by further decline in the next quarter, then the Australian economy would again be locked in a recession. However, until then, the best recourse for the market is to watch out for RBA’s upcoming decisions on Australia’s economic path.
Lending and upcoming trends
It is a well-known fact that record low-interest rates coupled with comfortable tax breaks in the property sector have harboured an abnormally high demand for housing for more than a year. The overwhelming demand has inflated the prices to such an extent that those stripped of cash are again being crowded out of the housing market by wealthier individuals.
Given the rapid strengthening of the housing sector in terms of prices, RBA has announced that it is monitoring the borrowing trends for housing carefully. The statement has spiked expectations of an interest rate hike in the coming months that could provide a breather to the ever-growing demand for housing.
Additionally, increased regulation by RBA could lessen any credit-related risks. Therefore, tighter policy action might be on the way, which could start with increased inflation acting as a catalyst for an interest rate hike. However, the central bank stated that it would maintain favourable conditions to move towards full employment and the desired level of inflation. The current policies in place should bolster the economy, as and when the need arises.
All in all, while the Australian economy rejoiced over a higher-than-expected economic growth earlier this year, one should not forget that the recovery came on the backs of eased monetary and fiscal action. Given the current conditions, fears of an economic upheaval might soon resurface if the lockdown continues for a longer time.