Economic Update

So, for two years, during the pandemic, the Australian economy appeared to be performing well, particularly compared to our trading partners, and yet suddenly, everything seems to have turned upside down.

Economist across the country appear to be talking only doom and gloom with many forecasting inflation will continue to raise and with it interest rates, bringing with it the prospect of a domestic recession.

The start of this correction can bet traced back to when Russia took the extraordinary step of marching into neighbouring Ukraine and in doing so, set in train a series of disastrous events.

It immediately caused a spike, specifically in oil prices and energy costs generally as European and global embargoes on Russian energy exports, prompted fears on worldwide shortages.

This quickly flowed through to higher petrol prices at local bowsers and with that a surge in transport costs, that sparked an unexpected uptick in inflation, not just in Australia but around the world.

Combined with the on-going supply chain issues caused by widespread illness and a drop in food exports from a debilitated Ukraine, fears of a worldwide bout of runaway inflation have rocked share markets around the world.

The fear is that rising inflation will cause central banks to increase interest rates which will have an adverse knock-on effect causing a downturn in business activity and potentially a recession.

This has been accentuated by several economies including Sri Lanka, Lebanon, and Turkey edging toward collapse and several African countries facing severe food shortages and famine.

All of this has undermined investment sentiment, causing a landslide in share prices for buy now, pay later companies, technology-based companies particularly those operating in the fintech space and other high-risk investments.

There has also been weakness in the major bank stocks, due to fears that higher interest rates will spark an upturn in bad debts but so far, the banks appear confident this will not occur.

Much will depend on the war in Ukraine. Whether it can be brought to an end or whether it will escalate and potentially lead to a second Asian war with China moving to take back Taiwan by force.

Nonetheless, here in Australia the underlying economy appears strong. Farmers are reporting record high grain and livestock production and prices for key exports such as iron ore and gas remain strong.

Domestic economic activity remains robust with employment levels high and most business reporting their inability to attract staff, particularly in regional areas.

While talk of rising interest rates have stalled rising property prices, the prospect of low unemployment suggests that most households will get through despite the recent surge in living costs.