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Australia & New Zealand

Australia & New Zealand Economics Focus

Australia & New Zealand Economics Focus

Australia - How far can interest rates rise?

Most analysts are overestimating the near-term negative impact of RBA rate hikes on household finances and are therefore underestimating the degree of tightening required to bring inflation under control. We now expect the RBA to hike rates to 2.5% by mid-2023, but we think that a housing downturn will force the Bank to reverse course in 2024.

19 April 2022

Australia & New Zealand Economics Focus

Australia - Efforts to combat climate change to weigh on mining

Efforts by overseas governments to combat climate change will result in mining falling from 10% of GDP last year to 5% by 2050. Rising exports of “green” metals are unlikely to offset falling coal and iron ore exports and slower growth in liquefied natural gas exports. While our base case is that mining output will shrink gradually, the lack of a sovereign wealth fund in Australia means that the country is less well placed to deal with a sudden drop in demand than other large commodity producers.

9 March 2022

Australia & New Zealand Economics Focus

Housing downturn will lead to RBNZ rate cuts in 2023

While the strength in New Zealand’s economy will cause the RBNZ to hike rates further this year, we think the RBNZ will end its hiking cycle earlier than the financial markets anticipate. What’s more, we think a housing downturn in 2022 will weigh on the economy at the same time as inflation is easing and the labour market is loosening. On that basis we expect the RBNZ to cut rates in 2023.  

12 January 2022
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Australia & New Zealand Economics Focus

Australia- Wage growth will approach 3% by end-2022

A renewed tightening of the labour market next year means that wage growth will accelerate further. That pick-up will be underpinned by a stronger minimum wage hike, the lifting of caps on public sector wage growth and more employees switching jobs. And if it is accompanied by faster underlying inflation, it should be enough to prompt the RBA to lift interest rates by early-2023.

Australia & New Zealand Economics Focus

The impact of the pandemic on inflation

We expect inflation to rise to the mid-point of the RBA’s target band over the next couple of years. The main driver is a continued tightening of the labour market and a pick-up in wage growth. By contrast, we think that the goods supply shortages resulting from the pandemic will subside before long and will be more than offset by a plunge in import prices due to the stronger exchange rate.

Australia & New Zealand Economics Focus

Australia - Pandemic unlikely to result in long-term scarring

The closure of the border will reduce Australia’s potential output by around 2.5%. But this will be partly offset by higher productivity growth due to increased usage of technology and more employees working from home. And the usual red flags that have signalled a permanent loss of output ahead of previous downturns are mostly absent. The upshot is that a prolonged period of austerity may not be needed after all and the Reserve Bank of Australia should be able to tighten monetary policy before long.

Australia & New Zealand Economics Focus

Pandemic-driven staff shortages could lift wage growth

Even though the unemployment rate is still as high as it was during the mining bust, job vacancies and the share of firms reporting staff shortages have surged. We suspect that this has been driven by a broad-based drop in labour mobility during the pandemic and net migration turning from a large boost to labour force growth to a small drag. As vaccines are rolled out and restrictions are relaxed, the functioning of the labour market should improve. But coupled with our optimistic forecasts for unemployment, firms’ inability to find suitable staff means that wage growth could rebound faster than most anticipate.

Australia & New Zealand Economics Focus

RBNZ to hike rates next year

We now expect the RBNZ to tighten monetary policy in the years ahead as GDP growth, the labour market and inflation will be much stronger than the Bank has anticipated. We expect asset purchases to be wound down from this year before the Bank hikes rates in 2022.

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