The Statement on Monetary Policy by the Reserve Bank of Australia (RBA) on 3 February 2022 depicts that, despite the Delta variant lockdowns, the Australian economy performed better than expected in the year ended 31 December 2021.
The economy produced higher results in the key economic indicators including economic growth, rate of unemployment, wage growth and household wealth creation. The inflation was higher due to higher level of economic growth and employment.
In December 2021, the rate of unemployment was expected to be 6% which turned out to be 4.2%, a marvellous achievement. The economy added over 64,800 jobs in this month. The rate of unemployment is expected to fall around 3% by the end of 2022, for the first time since the early 1970s. Australia is moving closer to full employment which is a situation when there is no involuntary unemployment. Full employment or at least low unemployment brings with it real economic and social benefits for Australians and their communities.
The RBA expected the Australian economy to grow by around 3% in 2021. Now it is expected to have grown by 5%, another high economic outcome. This is despite the lockdowns associated with the outbreaks of the Delta variant of Covid-19 in the second half of 2021. The economy is expected to grow by around 4.25% in 2022.
In 2021, wages were expected to grow by only 1.5%. This is now anticipated to pick up to around 2.5% in December 2021, which is marginally above its pre-pandemic rate of wage growth. In line with the expected higher level of economic activity and demand for human resources, the rate of wage growth is expected to be 3.25% in 2024, which would be the fasted growth since 2012.
For the year ended 31 December 2021, the rate of inflation jumped to 3.5%, well above RBA’s target band of 2 to 3%. The price of fuel, the cost of construction for new dwellings and the price of consumer durables accounted for about two-thirds of this general price increase (inflation). The rate of inflation is expected to be 3.25% by the end of 2022.
Much of the increase to 3.5% of the Australian inflation in 2021 is attributed to big rises in the prices of petrol and home construction. Over the years, world prices of oil go up and down due to international market forces/reasons and Australia has done virtually nothing to cause the recent rises in oil prices.
The other major contribution to this level of inflation relates to supply chain issues and mismatches between demand and supply for various goods and services, mainly because of Covid-19 outbreaks. The underlying rate of inflation excludes these unusual large price hikes in the economy and this (underlying rate of inflation) was 2.6% in 2021, which is within the RBA’s inflation range of 2 to 3%.
Australia is not the only developed economy experiencing high rate of inflation in 2021. Empirically, Australia’s rate of inflation of 3.5% was much lower than the USA (7%), the UK (5.4%) and our neighbor New Zealand (5.9%).
The most significant risk to the Australian economy continues to be health-related due to potential Covid-19 outbreaks. The rate of unemployment will probably settle to the pre-pandemic levels over the next few years. The resolution to the supply disruptions would partially offset inflationary pressures and check the underlying rate of inflation within the target band. The health outcomes are expected to be manageable in the forthcoming years.
The confidence of Australian households and their levels of spending are likely to be higher. In this scenario, the economy is expected to grow reasonably well, creating employment opportunities and generate incomes for all Australians.