Accelerated recovery on economic reopening

Growth is set to accelerate modestly in 2022 as Australia continues to reopen its economy and relax border restrictions. High vaccination rates provide the basis for Australia to move ahead with a “COVID normal” plan. Nevertheless, the possibility of a further setback from another outbreak is a significant risk to Australia’s economic outlook. Looser restrictions should contribute to a firmer recovery in household consumption (53% of GDP) in 2022, supported by sustained job recovery and higher accumulated savings. Increased savings helped strengthen households’ balance sheets over the second half of 2020 and the first quarter of 2021. Still, the household savings ratio rose again in the September quarter of 2021 after falling to 9.7% in June, as the Delta-variant outbreak temporarily constrained consumption opportunities.

Household borrowing has increased, lifting outstanding household debt to 126.1% of GDP (and 183.2% of disposable income) in Q2 2021, and may constrain household spending growth. Part of the rising household indebtedness is linked to the housing market rebound amid record-low interest rates. Sharper housing credit growth raised financial stability concerns, prompting tighter home lending restrictions. Barring further intervention of the authorities, such as tighter debt-to-income limits on loans or interest rate hikes, the housing market is set to continue growing, which will be positive for the construction sector (7% of GDP). Mining (10% of GDP) is expected to stay strong as global commodity prices remain at multi-year highs. Long-term electrification trends also benefit lithium and nickel mining firms. Meanwhile, tourism (3.1% of GDP in FY2018-19) is expected to recover gradually as international travel picked up in 2022.

Inflation remains low, despite the increase in 2021 reflecting higher oil prices and global supply chain disruptions. Wage growth remains modest, especially in the public sector. Furthermore, economic reopening and border restrictions easing may attract more temporary workers back into the workforce, helping a rise in the labor participation rate that should limit upward wage pressures.

Meanwhile, growth in Australian exports (25% of GDP), dominated by resources and energy (78% of total exports), should remain robust amid high commodity prices and continued global recovery. However, China’s efforts to limit steel output and diversify import sources for iron ore, and a further recovery in Brazilian supply, would negatively impact Australian iron ore prices. High freight fees would weigh on resource firms’ profitability.

Budget deficit to shrink

Government revenue is expected to grow faster than expenditure, helping to reduce the budget deficit. Stronger-than-expected receipts helped narrow the cash deficit in 2020-21 from a projected AUD 161 billion (-7.8% of GDP) to AUD 134 billion (-6.5% of GDP). For 2021-22, the AUD 589.3 billion budget (27.6% of GDP) includes an additional AUD 7.8 billion in tax cuts for low-to-middle income earners, an additional AUD 20.7 billion in business tax relief, and an additional AUD 15.2 billion over ten years to finance infrastructure projects. Public debt is still expected to increase, but external risks should be limited as foreign shareholding of Australian Government Securities (AGS) fell from 53.5% in June 2020 to 48.8% in June 2021, partly due to the Reserve Bank of Australia’s bond purchasing program.

Australia has been recording current account balance (CAB) surpluses for consecutive quarters since Q2 2019, supported by a growing trade surplus which, in turn, is backed by solid commodity exports. We expect the CAB surplus to be maintained in 2022, albeit smaller in scale, due to a potential return to a services trade deficit as border control easing should boost travel services imports. However, extended trade tensions between China and Australia should continue to weigh on some Australian exports to China, including coal. Meanwhile, the investment income deficit should shrink in 2022 as direct investment picks up, though deteriorating China-Australia relations could constrain Chinese investment growth in Australia.

Tight race expected for 2022 federal election

The center-right Liberal-National coalition, led by prime minister Scott Morrison, has held a slim majority in the House of Representatives (77 out of 151 seats, or 50.9%), with the opposition Labor Party at 45% (68 seats). In the Senate, vested with significant power, the governing coalition has held 47% of seats, and Labor 34%, with minority parties (19%), particularly the Greens, maintaining the balance of power. Support for Morrison has waned and remained fragile. Still, the Labor Party needs to be in a solid position to gain more support as pre-pandemic issues such as climate policy and political scandals are likely to resurface ahead of the polls (expected to be held between March and May), which could weaken the government stability.