Smoother economic ride predicted for 2022

The Australian economy is in for a smoother ride in 2022 because of higher vaccination rates and the lower likelihood of border closures, according to Janus Henderson investment strategist, Frank Uhlenbruch.

In an analysis of the Australian economic in the closing months of this year and the outlook for 2022, Uhlenbruch pointed to a less bumpy ride but noted the recent emergence of the Omicron variant.

“The threat from this new variant and its potential to affect the economic outlook remains to be seen. The high vaccination rates in NSW and Victoria mean they are not yet considering further lockdowns (at the time of writing), which should dampen the impact of this new virus strain on the economy,” he said.

“After falling around 3% in the September quarter, we look for a rebound in the December quarter to deliver economic growth of around 1.75% over 2021. For 2022, we expect the economy to reach mid-2021 levels by around mid-year and grow by 5.25% over 2022. Growth is expected to ease back to 2.75% over 2023.”

“As the economy goes back into catch-up mode from late 2021, labour market conditions should rapidly improve. Labour supply is poised to improve as international borders gradually open up, but employers still face challenges in meeting the expectations of a post-pandemic workforce with its greater preference for offsite working.”

“Inflationary pressures should be most acute earlier in the year, but gradually ease as supply chains catch up to pent up goods demand. Nevertheless, the risk of cyclical price pressures finding their way into higher core inflation is higher than it has been for many years.”

Uhlenbruch’s analysis also points to a tightening in monetary policy, but that this is less likely to occur in 2022.

“Towards the end of 2021 the Reserve Bank of Australia (RBA) abandoned its three-year government bond yield curve control target of 0.10% following an earlier than expected pick-up in the pace of underlying inflation. The move essentially re-linked cash rate moves back to developments in economic data, as was the case before the pandemic.”

The barrier to near-term tightening remains high, with the RBA indicating that it expected no change to the 0.10% cash rate over 2022. Markets remained unconvinced, factoring in four tightenings or a cash rate just above 1% at one stage.

“For the RBA to move, the following three hurdles will have to be cleared:

The unemployment rate will have to fall close to 4%;

Wages growth will have to lift to at least 3%; and,

Actual inflation will need to be around 2.5% on a sustainable basis.

“Our view is that these hurdles will not be cleared until mid-2023 when we expect the RBA to commence a tightening cycle that takes monetary conditions from a highly accommodative to a more neutral stance.”