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BILL’S BITES: 2022’s eye popping growth picture

08:16pm December 08 2021

Westpac chief economist Bill Evans discusses the outlook for the economy, inflation and interest rates. (Josh Wall)

We recently released our new forecasts for the Australian economy for 2022 and beyond. 

And we've taken two approaches in working out that growth story.

Firstly, from a top-down perspective, pre-COVID we thought that the economy would expand by 7.8 per cent between December 2019 and December 2022. However, now we think it'll expand by 8.5 per cent over that period. 

Why, despite the fact that period covers the COVID contraction? 

Well, on the on the negative side, we've got a long period of very low population growth reflecting the closure of the borders, plus a likely substantial scarring in the business sector as many don't make it through. 

I also think we'll continue to see caution amongst households in in relation to the risks of any new COVID strains.

But of course, there's positives, the big one being the government support for the economy, which is around $350 billion based on both federal and state support. And then,  we've seen the Reserve Bank’s near zero interest rates, which of course has brought down mortgage rates and strongly supported the housing sector

We are expecting 2.3 per cent GDP growth in the December quarter and then 6.4 per cent in 2022 – an eye popping number and certainly higher than others. For instance, the RBA is expecting 5.5 per cent. 

If we look bottom up, I think the key thing there is the household savings rate. 

Since the June quarter 2020, the household savings rate has averaged around 17 per cent compared with around 6-7 per cent normally. So, per quarter, the household sector has been saving about 10 per cent more income than we've seen in the past – and that money is ready to be spent. 

So we're expecting underlying inflation and wages growth will get close to 3 per cent by the end of 2022. 

And that, of course, is the signal for the lift off for interest rates.

Since June this year, we've been expecting the RBA would be raising interest rates from February 2023, and that remains our view. 

Of course, the market has a very different view. The market is assuming that inflation and wage pressures will be even stronger than we're anticipating, and that'll make the case for the first rate hike around the middle of next year, with three rate hikes over the course of next year

The market, indeed, is expecting the peak in the RBA cash rate cycle will be around 2 per cent by around the end of 2023. But we're expecting that the right peak will be around 1.25 per cent, given we see that as a neutral level and rates above that will be contractionary and put even further downward pressure on house prices. 

So, 2023 will be a year of rising rates, falling house prices, and 2024 will be similar. 

What are the risks? 

Of course, the market is telling us that the inflation and wages story will take off a lot more quickly than we're expecting, making a case for RBA rate hikes a lot earlier.

That, of course, would significantly change the growth profile, the labour market profile and the house price profile. 

How extreme are these imbalances between demand and supply? How quickly will those inflation and wage pressures reach a point where the RBA needs to take action? 

We believe the first quarter of 2023, the market believes a different number, 2022. 

As with recent years, it's going to be very interesting. 

But the most important point is we’re going to see a year of very, very strong growth in 2022. 

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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