The Australian domestic economic outlook in the near to medium term will be dominated by rising costs for a wide range of goods, services and labour. To June 2021 Australia’s domestic economy recorded a 3.8% rise in the Consumer Price Index (CPI) which was a better than expected result. However, during the second half of 2021 many early indicators show that there are further cost increases on the way.
In recent weeks fuel prices have reached a 14 year high of around $1.50 per litre. Meat and food in general has also risen by 5-6% with warnings of further increases towards Christmas. In addition, international shipping costs rose significantly during the same period which will ultimately result in higher prices for all imported goods.
With an extreme skilled labour shortage in Australia construction, manufacturing and many other sectors are under pressure to meet increased demand with a capped workforce. A shortage of materials as well as this labour shortage has already resulted in higher prices for locally produced goods. Although the full impact is yet to be captured in published economic data the overall trend indicates a rising cost of living.
Supply chain constraints, higher shipping costs for imports and increased transport costs flowing from rising fuel prices may constrain domestic production and lead further price rises. The recent and ongoing housing boom has exacerbated shortages in the supply of timber, steel, concrete and other building products. Major government infrastructure projects such as the Federal Government Inland Rail Project (1700km of new freight rail track form Parkes to Brisbane) and NSW Waters’ drought proofing projects has already taken up a vast skilled labour force. These projects have also drawn down heavily on the supply of construction materials normally sent to other areas.
The current spike in energy costs across the UK and Europe may have a ripple effect and lead to higher prices for imports from the countries impacted. A worst case scenario being further inflationary pressure on the national economy throughout 2022. The result would be not only a higher cost of living but also mortgage stress in highly leveraged home buyers on fixed incomes.
The good news from economic commentators is that Australia appears to have avoided a double dip recession in the second half of 2021. Despite the lockdowns in Sydney, Melbourne and some regional areas unemployment has remained relatively low with businesses finding ways to trade through increased online shopping and innovations around home delivery or click & collect services.
IMF current predictions are that Australia’s GDP will grow by 3.3% in 2022 and a more sedate 2.5% in 2023. This anticipates a strong rebound in late 2021 from the effects of COVID restrictions with increased vaccination rates and an end to lockdowns. Australia’s strong mining and resources sector which was largely unaffected by COVID has played a major role in our economic performance to date and this will continue for many decades to come.
There are many exciting opportunities for our growing region in the next few years as the economy adjusts to the recent dynamics of dealing with COVID. An expected influx of people from metro areas will continue to drive demand for housing, infrastructure and services whilst bringing new businesses to the area. Rising prices and skills shortages could be countered by innovation, skills programs, a resumption of immigration and “boutique” manufacturing utilising robotics.
A major positive effect of the recent upheaval is the recognition that we must develop more local capacity and be less reliant on imports. The increased costs of imports and lack of reliability should make locally produced manufactured goods more competitive and attractive. A major boost to domestic manufacturing may be a medium to long term result from the economic impact of COVID particularly in regional economies such as Port Macquarie.