The Australian economy appears to be teetering on the edge of a recession, with almost as many indicators suggesting a dramatic fall in economic activity as indicators suggesting continued strong growth.
The key issue remains the domestic rate of inflation.
The latest Consumer Price Index (CPI) figures provided some hope, showing inflation fell from 6.8 percent in April to 5.6 percent in May, the lowest reading since April 2022.
However, excluding volatile items such as fruit and vegetables and petrol from the CPI Index shows it fell only slightly, from 6.5 percent in April to 6.4 percent in May, prompting many economists to suggest more interest rates rises are on the way.
The underlying level of inflation is now not expected to return to the Reserve Bank’s target band of 2 percent to 3 percent until sometime in 2025, and possibly as late as 2026.
Nonetheless, higher rates are already having an impact, with consumers cutting back on their discretionary spending.
The online booking service, Booking.com.au, and other leaders in the short-term rental market are reporting a sudden and dramatic fall in bookings as holidaymakers decide to save their money and stay at home.
Retail spending also appears to have fallen off a cliff, with large national retailers such as Best and Less, Adairs, Domino Pizza and the Retail Food Group all reporting a sharp slowdown in retail trading figures.
In the business sector, the number of failed businesses reached 650 in May, according to the Australian Securities & Investments Commission (ASIC), up some 58 percent on April, and 50 percent higher than a year earlier.
While most home buyers appear to be using existing saving buffers to offset the financial pain of higher interest rates on their mortgages, non-bank lenders, who traditionally lend to more high-risk customers, are starting to report a rise in defaults.
Against this, employment remains strong, offsetting the impact of higher interest rates for many.
Labour force figures for May show employment increased to 14,003,400 people nationwide while the unemployment rate held steady at 3.5 percent.
Inflationary pressures are feeding through to higher wages, which raises the prospect of stagflation emerging, an economic condition that occurs when prices and wages continue to rise, even when the broader economy has fallen into recession.
Optus recently announced it was giving its 1500 retail staff a 7 percent pay rise, while the manufacturer Visy will pay staff 8.6 percent more due to CPI increases included as part of their award agreements.
Housing prices also appear to be holding firm; however, statistics are heavily influenced by strong one-off prices achieved for individual properties. At the same time, exporters continue to achieve record-high prices for Australia’s iron ore, coal and wheat shipments.
Importantly though, interest rates continue to climb overseas. The Bank of England lifted interest rates again by 0.5 percent in June, while the head of the Federal Reserve in the United States spoke of more rate rises there.
Cash rates in New Zealand, Canada, the United Kingdom and the United States are now all set near, or in excess of, 5 percent, while Australia’s cash rate is still at a relatively low 4.1 percent. This means it is almost certain Australia will experience even higher interest rates regardless of what the next round of quarterly inflation figures show.
If local rates don’t keep pace with higher rates among our major world trading partners, the value of the Australian dollar will inevitably fall, pushing prices for imports and inflation even higher, undoing much of the recent hard work by the RBA.
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