As of July 2022, the Australian economy is in a confronting state of play. Australians are facing real financial pain as the inflation and interest rates are on the march but the real wage growth is on the back foot. Cost of living out goings on essential shopping, electricity bill, mortgage payments and petrol are increasing fast.

In the year to March 2022, the real wages decreased by 2.7%, the worst outcome in more than two decades.

The major economies of the developed world are either travelling at the slow lane of growth or at the brink of a recession, largely due to global inflation, slow global economic growth, impacts from Covid-19, supply chain issues and war in Ukraine. It would require suffering on behalf of Australian households to tame inflation and avoid recession in the economy.

Inflation

In the year to June 2022, the rate of inflation was 6.1%. The Australian Treasury now forecasts the inflation to peak 7.75% by 31 December 2022. They forecast the headline inflation to be at 5.5% by 30 June 2023, 2.75% by 30 June 2024 and 2.5% by 30 June 2025.

Reserve Bank of Australia (RBA)’s target range of inflation is 2 to 3% a year. At the current rate of inflation, the purchasing power of the income and wealth of Australians will continue to erode at a higher rate than expected by the RBA till the end of next year. If this high level of inflation is left untreated for too long, it will undermine Australian living standards and wreck the economy on the long run.

Economic Growth

The Australian economy is expected to grow slower than what was forecasted in the Pre-election Economic and Fiscal Outlook 2022. Economic growth forecasts have been cut down by half a percentage point from the financial year ending 30 June 2022 to 30 June 2024. The real GDP is now expected to have grown by 3.75% in the financial year ended 30 June 2022, 3% in the financial year ending 30 June 2023 and 2% in the financial year ending 30 June 2024.

This weaker economic growth outlook is due to various factors including weak consumption, high inflation, increasing interest rates, domestic floods affecting exports, low dwelling investments and constraints in the construction sector.

Rate of Unemployment

In the quarter ended 30 June 2022, the rate of unemployment was 3.5%, the lowest since August 1974 when it was 2.7%. The high rate of employment is expected to be maintained till 31 December 2022. The Treasury expects the rate of unemployment will be returning back to 3.75% by 30 June 2023, 4% 30 June 2024 and 4.25% by 30 June 2025.

Real Wage Growth

The forecast for nominal wage growth is 3.75% in the financial years ending 30 June 2023, 30 June 2024 and 30 and 2025. Given the high rate of inflation, Australian households may not see a real growth in wages and salaries before the first half of 2024. The real wage growth will rely on moderating inflation and getting wages moving up wards again.

National Debt

Federal budget has $1 trillion debt. The Treasury expects that the interest payments on government debt will be the fastest growing area of government expenditure in the coming fiscal years and this will grow faster than the spending in National Disability Insurance Scheme, aged care and health care including hospitals.

For a better economic and financial well-being, there should be more measures to help Australians with cost of living pressures, grow salary and wages by decent pay rises, contain inflation and deal with supply chain issues of the economy.