The year in Australian economics: inflation roars, interest rates bite and real wages fall off a cliff | Greg Jericho

Energy companies began swimming in cash and unemployment kept dropping in a 2022 that defied predictions

And so we come to the end of 2022, an economic year of two budgets and unemployment and inflation at levels not seen for decades.

So what were the key economic stories?

Inflation and the Russian invasion of Ukraine

The biggest economic story of the year is inflation – and the impact of the illegal invasion of Ukraine that took it from a transitory problem to one that has kept on going.

The big winners of course are the oil, gas and coal companies, which made obscene profits amid the human suffering:

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Prices were already rising for oil and coal as the pent up demand from the lockdowns generated good business for energy companies. Then Vladimir Putin decided to invade a sovereign nation and those energy companies were able to start swimming in cash like Scrooge McDuck in his money bin.

That the idea of taxing their windfall profits is seen by some commentators as an extreme idea is truly a depressing moment in our polity.

As energy prices rose, so too did inflation:

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But in Australia the biggest driver of inflation was house prices – or more specifically the “new dwelling purchases by owner occupiers”, which is the price of building a new home, excluding the cost of land.

In the 12 months to September, it accounted for a quarter of all inflation growth.

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Take away the cost of building a new home, which is hardly a regular purchase, and inflation falls to 5.5%.

The next biggest contributors to annual inflation were petrol prices – due to the rising world oil price – and the price of vegetables, which soared due to floods.

Neither of those things care all that much about interest rates.

Which takes us to the Reserve Bank of Australia and what it is doing.

Interest rates no longer at record lows

This is one that took me by surprise. I did not think the RBA would be so hard line, especially given much of the inflation was driven by international events.

Even the RBA was taken by surprise. In February, the Reserve Bank governor Philip Lowe said that although the bank had ceased purchasing bonds, this “does not imply a near-term increase in interest rates”. He also suggested that underlying inflation would “increase further in coming quarters to around 3¼ per cent, before declining to around 2¾ per cent over 2023”.

Underlying inflation is now 6.1% and the RBA expects it to hit 6.5% before declining to 3.8% though 2023.

At the start of the year the market anticipated the cash rate to now be at 0.85%. By April, the expectation was for it to reach 2%. Once the RBA increased rates in May expectations rose and by June the market priced in a December cash rate of 2.7%.

The actual rate is 3.1%.

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Over the past eight months the repayments on a new $500,000 loan have risen 41% from $2,232 a month to $3,144.

For current mortgage holders, the increase has not been that great because some of their rate rises are still flowing through. The market predicts at least a couple more rises – with the peak at about 3.75% in August next year.

Journalist: ‘Would you support a wage hike of at least 5.1% just to keep up with inflation?’ Albanese: ‘Absolutely’

When Anthony Albanese supported the minimum wage increasing in line with inflation growth, I began to start feeling confident the Labor party would win the election.

This wasn’t just because of his position, but because the overblown reaction absolutely tanked. Journalists suggested it signalled a return to the 1970s, Scott Morrison said it showed Albanese was a “loose unit”, and all the while voters were asking, “Errr, what world are you living in?”

Wages growth – or the lack of it – came to the fore in the election and Albanese hit the perfect note, while Morrison and those very serious commentators who kept banging on about a wage-price spiral looked increasingly out of touch.

The RBA has also taken to warning of the dangers of a wage-price spiral. But all the while real wages are falling faster than they have since the ABS started measuring wages in 1997:

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Unemployment with a 3 in front of it

We should be seeing some better wage growth because right now unemployment and underemployment are extremely low.

In March, unemployment went below 4% for the first time since doing so for a month in 2008. This time it kept falling and is now at 3.4%, while underemployment is 5.8%, a level that it has not consistently been at since the 1980s.

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Unemployment doesn’t tell the whole story of the economy – for example, it remains affected by low numbers of migration – but there is no doubt that a rate consistently below 4% is good news, and worth cheering.

‘There has been a $144bn error in your favour’

You know what low unemployment, rising inflation and rising oil, gas, coal and iron ore prices are good for? The budget.

The treasurer, Jim Chalmers, campaigned during the election assuming the 2022-23 budget would bring in $548.5bn in revenue. By the time he handed down the October budget, treasury was now estimating an extra $58.7bn – just a lazy 11% more money in the kitty.

It wasn’t due to better economic management – it came from “parameter variations”. The extra $144bn over four years came from the treasury increasing its estimates for inflation (more revenue), wages and employment (more income tax revenue) and resources prices (more company tax revenue):

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The estimate for company tax in this financial year went from the $90.2bn in the March budget to $127.2bn in the October one.

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All up this meant Chalmers was able to forecast lower deficits – but crucially only out to 2023-24. From then on things get worse.

Well, that recovery was nice while it lasted

This time last year the RBA was estimating that Australia’s economy in 2022 would grow 5.5%. In February it revised it down to a still healthy 4.25%. By the August statement on monetary policy, it was down to 3.2% and then in November the central bank further downgraded its GDP growth estimate to 2.9%.

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Even worse is that the RBA’s forecasts for 2023 have fallen from a weak 2.5% growth to an abysmal 1.4%.

If the RBA wanted to slow the economy by raising rates, it clearly is achieving its goal. And it is not expecting just a small dip. The RBA currently estimates Australia’s economy will grow by just 1.6% in 2024.

As I noted when the estimate was released, that would be a historically awful two years, and would very likely mean a recession.

So what defined economics in 2022?

A terrible war saw prices rise and companies profit off that tragedy. Unemployment remained extremely low and finally we saw wages begin to rise, but by nowhere near enough to keep up with the cost of living.

In what seems to have been a boom year, people’s living standards fell drastically.

And with the RBA lifting rates faster and by more than it has in 30 years, the economy is now slowing quickly.

A lot of predictions 12 months ago have been shown to be wrong. For all our sakes let’s hope the dire predictions for 2023 are also incorrect.

• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work


Greg Jericho

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