For the past 20 years we have produced “The Big Issues” report – a report that has sought to highlight the issues that are expected to influence the economy and financial markets over the forthcoming 12 months.
This is not a crystal ball gazing exercise. The aim is not just to forecast where certain economic variables are likely to be in a year’s time. Rather the focus has been to highlight trends, issues and ‘big picture’ influences that act as threats or opportunities for consumers, investors and businesses alike.
We undertake this analysis by balancing the text with a healthy spattering of graphs and pictures to best highlight the issues we think will prove important in 2022.
This year we have our usual Big Issues list. But we again provide a list of Talking Points: topics that may not have the same influence on financial markets but are likely to form part of economic discussion over 2022.
You may not agree with all of our choices of Big Issues for 2022. But hopefully the discussion prompts you to come up with your own list of things you will be watching closely over the coming year.
But First… The Economic ‘State of Play’
Review of the Past Year
- In addition to our ‘Big Picture’ analysis of key economic issues, we feature a recap of the past year’s economic performance together with an outlook for the economy for the coming twelve months.
- This economic assessment largely sets the scene for the discussion of the Big Issues. Because there are themes and trends that have evolved over the past year that affected economic performance. A valuable starting point is to establish whether the same factors or indeed new factors are likely to dominate in the coming year.
- In the March quarter the economy grew by 1.9 per cent and it followed this up with a 0.7 per cent lift in the June quarter. Then along came the Delta virus strain, sidelining the NSW, Victoria and ACT economies.
- The Australian economy may have contracted as much as 4.3 per cent in the September quarter before rebounding in the current December quarter by around 4 per cent.
- The cash rate currently stands at 0.1 per cent; Aussie dollar is near US73 cents; unemployment stands at 5.2 per cent; annual underlying inflation is 2.1 per cent; and the ASX 200 index is near 7,400 points.
The year ahead
- As we approach the end of the 2021 calendar year, it is clear that Covid-19 still dominates the landscape.
- The bad news is that major economies including China are still dealing with virus outbreaks and that has led to localised mobility restrictions.
- The good news is that vaccination rates continue to lift, allowing economies to reopen and permitting more ‘normal’ conditions to return.
- The economic outlook will clearly be dictated by Covid‑19. This includes the potential for fresh virus outbreaks; the potential for new variants to appear; continued application of social hygiene measures; viral treatments (such as a pill); and changes to mobility and vaccination rates.
- Underlying inflation is expected to broadly hold near 2.25-2.50 per cent over 2022.
- Before lifting rates the Reserve Bank (RBA) wants underlying inflation to be sustainably between 2-3 per cent; wants to see the jobless rate fall to 4 per cent; and wants to see annual wage growth lift to around 3 per cent in response to a tighter job market. The RBA doesn’t expect these conditions to be realised until 2024, or late 2023 at the earliest.
- Commonwealth Bank Group economists believe that these pre-conditions may be met earlier – in fact ‘normalisation’ of rates is expected to begin in November 2022.
Living with Covid-19
- Reports of an outbreak of a new virus (Covid-19) started to appear in early January 2020. World consciousness of the virus increased from around January 20. On January 30 the World Health Organisation declared the novel coronavirus a global health emergency.
- From the first case identified in late January, case numbers hit a then peak in China at 58,016 on February 17 before declining. Global case numbers also eased to March 7 before then accelerating higher again.
- In response to the medical threat, Governments across the globe locked down their borders and economies. But there were varied degrees of stringency, and as a result the relative success in suppressing the virus also varied.
- The aim of the lockdowns was to prevent hospital systems from being overrun and curtailing the death rate. With economies in lockdown, Governments and central banks had to respond by providing unprecedented emergency support and stimulus measures. So there has been an enormous economic cost to add to the social cost.
- The statistical website “Our world in data” estimate that there have been 250 million cases of Covid-19 since inception with 5.06 million deaths. The global economy contracted around 3.5 per cent in 2020 – the worst economic downturn since World War II – or in peacetime, the worst downturn since the great depression of the late 1920s/early 1930s.
- While the social and economic costs have been almost unprecedented, similarly unprecedented has been the global response in developing and administering vaccines. Around 11 months after the virus emerged, vaccines started to be administered across general populations.
- It has been estimated that 51.1 per cent of the world population has received at least one dose of a Covid-19 vaccine. Just over 7.3 billion doses have been administered globally, and 27.36 million are now administered each day.
- During October 2020, the fast-spreading Delta variant emerged and it was recorded as a variant of concern in May 2021. Just as countries thought that they could eradicate the virus, they were forced to change to a strategy of suppression/vaccination.
- Now countries across the globe have similar aims – to vaccinate as many people as possible, as quickly as possible, so that some form of social and economic ‘normality’ can be restored.
- Covid-19 will likely continue to exist for some time, but now it is a case of living with the virus. And that includes all aspects of people’s daily lives – work and leisure – and all aspects of economies across the globe.
Winding back stimulus
- When you are staring into the abyss – as much of the world was back in early 2020 with the onset of Covid-19 – it is an easy matter for Governments to spend money. To prevent the spread of the virus businesses were forced to close and people were forced into lockdown. And they required economic support to get through the crisis.
- In Australia a raft of measures were introduced to support and stimulate the economy including the JobKeeper wage subsidy program, extension of business asset write-off provisions, allowing people to access their superannuation and rental and mortgage ‘holidays’.
- From a broadly balanced position in late 2019, the Federal Budget deficit rose sharply over 2020, reaching a record $204 billion in the year to February 2021. State and territory budgets were similarly hit by the need to implement Covid-19 support measures.
- At the same time, the Reserve Bank introduced unprecedented support measures such as a 0.1 per cent 3-year bond yield target and a program of government bond purchases.
- The support and stimulus measures were extraordinarily successful, especially measures to keep people in work. The jobless rate rose from 5.1 per cent in February 2020 to a peak of 7.4 per cent in July 2020 and currently sits at 5.2 per cent.
- The process of removing the ‘temporary’ support measures has been underway for some time. JobKeeper ended on March 28, with final payments processed in April. There was some hope at the time that this would be the end of job subsidies. But the lockdowns that were required in response to the Delta variant led to fresh support measures being provided. The Reserve Bank has also scrapped the 3-year yield curve target and has begun tapering bond purchases.
- The need for flexibility with support and stimulus measures has been amply demonstrated since early 2020. And there will be constant consideration in the year ahead about retaining, revising and removing the fiscal and monetary measures. If measures are kept in place too long then businesses and workers become dependent on them and there is a cost to budgets. But remove measures too quickly and the economy could face the risk of stalling.
‘Regional renaissance’
- Regional Australia has enjoyed a renaissance during the pandemic, benefitting from significant societal and economic changes. Flexible working-from-home (‘WFH’) arrangements have encouraged increased regional migration as city dwellers opt for a ‘sea and tree’ lifestyle change. At the same time, economic conditions in regional Australia have improved following devastating droughts and bushfires, encouraging a “stayer effect”. According to the latest Commonwealth Bank (CBA)-Regional Australia Institute (RAI) Regional Movers Index, net regional migration is up 14 per cent over the year to September.
- Regional migration has been supported by greater worker mobility and fewer virus social distancing restrictions. In this environment, regional labour markets have been more resilient during the pandemic than metropolitan areas. In fact, the average unemployment rates for the regions are amongst the lowest in the country. Labour demand has been particularly strong in regional areas with the National Skills Commission reporting record job vacancies of 74,300 in October 2021.
- Regional property markets have outperformed their city counterparts during the pandemic due to WFH flexibility, strong population growth and record low interest rates. According to CoreLogic, regional home prices advanced 24.3 per cent over the year to October 2021 – the strongest annual growth rate in 17½ years.
- A record 4.7 million city dwellers are expected to head to regional holiday destinations this summer, up 12 per cent on a year ago, according to the latest SCA iQ Summer Study. Spending on accommodation and restaurants could surge.
- Despite the recent setback from Delta virus outbreaks, Australia’s pandemic economic recovery has been underpinned by the agricultural sector. The farm economy, as measured by GDP, soared by 48.3 per cent over the year to June 2021 (latest reading) – the fastest growth rate in 17 years – to a record high of over $11.7 billion.
- Rural exports are also near record high levels, up a massive 68.5 per cent over the year to September 2021, despite Chinese tariffs and import duties on an array of agricultural-related goods. Strong prices for grain, and good growing conditions, have driven another near-record winter crop-planting program across the country, with early estimates for a second-straight year of bumper tonnages of wheat, barley and canola when harvested at the end of the year.
- Commodity prices in the beef and lamb sectors are also supporting producer confidence, with low supply and high demand for protein pushing prices to levels not seen before. And dairy confidence is strong on the back of favourable milk price contracts and improved water allocations. But labour shortages have been causing some headaches for farmers and the issue will remain in focus in 2022.
- The farm sector has been at the forefront of a pick-up in business investment. Fast-rising rural property values, record low interest rates and the federal government’s instant asset depreciation write-offs have all fuelled a farm sector-buying spree of plant and equipment. Healthier landholder debt to equity ratios, courtesy of higher land valuations, are giving farmers the confidence to start borrowing and buying again. A key focus for 2022 will be increased investment in Australia’s world class ‘AgTech’ sector, which could create jobs and new export opportunities for regional Australia.
China: Mao, Deng, Xi and ‘Common prosperity’
- Chinese President Xi Jinping stamped his authority over the Chinese Communist Party in 2021. In November, the party passed an “historical resolution” at its summit, highlighting its achievements under Xi’s leadership. Just two other leaders have been elevated into that rare pantheon – party heavyweights Mao Zedong and Deng Xiaoping.
- The “Leader for Life” has had a lot on his plate recently, contending with persistent Delta virus outbreaks through a “zero-Covid” lockdown strategy that has shut down ports and disrupted factories. Supply chain frictions have also been exacerbated by frequent power outages amid an energy crisis, pushing up petroleum, gas and coal prices.
- In the Chinese property market the Chinese government has struggled to contain a huge debt build-up. Property developers, including China Evergrande Group, have been starved of cash since authorities last year unveiled the ‘three red lines’ – a key policy plank of President Xi that imposes limits on liabilities-to-assets, net debt-to-equity, and cash-to-short term borrowing ratios. The liquidity squeeze has resulted in offshore defaults, credit rating downgrades and sell-offs in developer shares and bonds.
- At the centre of the recent economic tumult has been President Xi’s ambitious ‘common prosperity’ initiative, which has seen a regulatory blitz focused on a tightening of measures across the technology, property and education sectors. A fundamental shift in policy mindset from a focus on economic growth to social equity could usher in broad changes in taxation, social security, income transfers and other areas aimed at narrowing China’s rising income inequality.
- Another key aspect to Xi’s plan involves strengthening Chinese nationalism, seen most clearly by China’s moves to press its claims on Taiwan, a self-governed democracy.
- Political tensions between Beijing and Canberra, with the imposition of Chinese import tariffs and duties on Aussie exports, have failed to slow shipments to Australia’s largest trading partner. But businesses will be hoping for détente between the two powers in 2022. China’s property crisis and a clampdown on pollution in the steel industry ahead of the Beijing Winter Olympics are other issues to watch, especially from the vantage point of Australia’s iron ore and energy sectors.
- The twice-a-decade Communist Party Congress will be held in the second half of 2022, with an increasing focus on “new or green infrastructure.” China continues to pivot its economy away from a dependence on traditional sources of growth, including fixed asset investment, towards consumer spending and the decarbonisation of future industries.
- Commonwealth Bank (CBA) Group economists expect the Chinese economy, as measured by GDP, to expand by 8.1 per cent in 2021, before slowing to an annual pace of 5.3 per cent in 2022.
- We think that the authorities are unlikely to unleash significant fiscal stimulus with much of the structural tightening here to stay. Exports are likely to grow in 2022, but only a gradual recovery in consumer spending is expected due to a continuing “zero-Covid” tolerance.
Climate change
- Climate change has featured in our Big Issues report over the past decade. The issue has been represented in various guises such as carbon trading and the cost and prevalence of natural disasters. And we would expect that Climate change will regularly feature on the Big Issues lists for some time to come. It is an issue with both immediate and longer-term effects and consequences, with the consequences becoming more pronounced the longer there is lack of short-term action.
- At a global level the focus is now on the annual United Nations Climate Change Conference (Conference of the Parties or COP). At time of writing the Glasgow Conference (COP26) had just ended. The next iteration, or COP 27, will be held in Sharm El-Sheikh, Egypt from November 7-18, 2022. The COP28 conference is slated for the United Arab Emirates in November 2023.
- The agreed decisions from COP26 can be found here: https://unfccc.int/process-and-meetings/conferences/glasgow-climate-change-conference-october-november-2021/outcomes-of-the-glasgow-climate-change-conference
- It is actually not easy to find this statement. You have to wade through a mountain of documents. And that is a criticism on the bureaucracy that has developed around climate change issues.
- The good news about COP 26 is that it ran into ‘overtime’ and that an agreement was struck by the 197 countries that attended. The bad news was that the agreement disappointed a raft of governments, businesses and individuals that had hoped for more rigorous and urgent action.
- For the first time the COP agreement calls for the phase down of the use of unabated coal for power. (“…accelerating efforts towards the phase-out of unabated coal power and inefficient fossil fuel subsidies, recognizing the need for support towards a just transition.”)
- There was also a commitment by 130 countries to end deforestation by 2030. The agreement also calls on countries to detail new pledges (or more ambitious strategies) at the 2022 COP27 to address climate change rather than in five years’ time.
- The goal to limit global warming to 1.5 degrees Celsius remains but it will require more action from countries to achieve the target.
- There was disappointment that countries didn’t go far enough with commitments to address climate change. But on a daily and monthly basis, the focus will be on the strategies and plans proposed by companies – especially big multinational companies – to deal with climate issues and broader global goals.
- The Federal Government’s climate change strategy was agreed by the Coalition parties ahead of COP26. The report “Australia’s Long-Term Emissions Reduction Plan” can be found here.
- The report as well as the responses by the Labor Party and The Greens will dominate discussion as the 2022 Federal Election draws closer.
Jobless rate: How low will it go?
- Apart from inflation, another regular on our Big Issues reports over the years has been the job market. Last year the issue was just presented as Jobs while in 2019 the issue was represented as Full Employment.
- It’s important to get some perspective on how the job market has performed in recent times – before and during the Covid crisis. In February 2020 – just before Covid-19 started to impact the economy – the jobless rate stood at 5.2 per cent. That rate was considered high by the Reserve Bank. Remember back in May 2019 the Reserve Bank Governor delivered a seminal speech saying “the Australian economy can support an unemployment rate of below 5 per cent without raising inflation concerns.” Rates were cut in June, July and October 2019. But despite the easier policy stance the jobless rate had seemingly stalled at 5.0-5.3 per cent over the 18 months to February 2020.
- Supported by JobKeeper and a raft of Reserve Bank measures to ease monetary policy, the jobless rate “only” rose as high as 7.4 per cent in July 2020. While this was a 22-year high, it was well below some forecasts (including Federal Treasury) of 10-15 per cent. And just over a year later the jobless rate hit a 13-year low of 4.5 per cent.
- As noted, JobKeeper was one of the factors that prevented the headline jobless rate hitting Depression-era highs. And other stimulus and support factors have also driven the economy ahead, keeping the jobless rate low.
- But another factor to throw into the mix is the closure of foreign borders. Businesses have had no alternative but to hire domestic labour, whether or not skill sets have matched requirements or not. This situation has become more problematic for some businesses, especially in hospitality, construction and rural industries. Annual wage growth hit 7-8 year highs for a number of industries in the September quarter 2021.
- The question is what happens when foreign borders are fully open. Will the jobless rate stall again near 5 per cent? Or will the on-going economic stimulus continue to drive the jobless rate toward 4 per cent?
- The Reserve Bank hasn’t defined a ‘full employment’ level although it is assumed to be near 4 per cent. What the Governor has said is “Our focus has been on returning inflation sustainably to the 2 to 3 per cent range and doing what we reasonably can to reach full employment. These are our goals and it is progress on these fronts that will continue to determine decisions about the cash rate.”
- And that’s why the job market will remain one of the key issues of 2022.
Inflation: Just how transitory?
- Inflation has featured regularly on the Big Issues list. But its inclusion hasn’t always been to discuss high rates of inflation. In fact in 2018 the issue was described as: How long will inflation stay low? And in 2017 the issue was written as: “Inflation at an inflexion point?”
- Understandably, last year we just included Inflation on our list of ‘talking points’. Clearly we thought there would be more pressing issues to discuss.
- But arguably inflation has indeed been a Big Issue rather than a talking point – especially over the past few months. And that’s because economies have reopened more quickly than most people generally thought was possible a year ago. And linking it back further, that’s because vaccines (not one, but many) against the Covid-19 virus have been developed and produced in super-quick time.
- Economies have opened up and people have resumed their more ‘normal’ spending behaviours. The problem is that for many months producers either couldn’t or wouldn’t produce goods in the same quantities. So now we have stronger demand by consumers, producers that are struggling to supply the goods, and trains, planes and trucks that can’t get the goods to consumers quick enough.
- So we are hearing the term ‘supply chain’ more than we have heard – or wanted to hear – before. It’s not just one product, and it’s happening across supply chains from raw materials to finished goods to distribution and transport. And with demand racing ahead of supply, prices are rising.
- Central banks largely believe that this is a ‘transitory’ or ‘temporary’ phenomenon. And that makes sense, more people are back at work and supply should adjust to the higher demand. So central banks are inclined not to rush ahead with higher interest rates to quell the demand, believing that markets will work it out.
- But what if they don’t? What happens if inflation remains at historically-high levels? Inflationary expectations may become entrenched at higher levels, making it harder for central banks to set policy.
Migration
- There are a number of Big Issues that make a return in 2022 and Migration is one of them. And the reasons are multi-faceted.
- First, is the differing strategies that are currently being applied by federal, state and territory governments. Some governments such as NSW and Victoria are wanting faster re-engagement with the rest of the world – the ‘Living with Covid’ strategy. But other governments such as Western Australia are opting for more conservative strategies on the opening of domestic and foreign borders.
- The key question is what happens if there is an escalation of Delta cases or emergence of new virus variants. The risk is that a multi-speed Australia emerges, leading to greater uncertainty for domestic and overseas travellers alike. And this uncertainty could prove damaging to our in-bound tourism sector.
- Second, with foreign borders closed, this has caused labour shortages to develop, especially in construction and hospitality. For Aussie job seekers, there has probably never been a better time to find work with skilled job vacancies at 13-year highs.
- But what if job seekers don’t have the desire or skill-set to fill the available positions. How long does the federal government give domestic job seekers before it more aggressively opens the borders to backpackers, tourists and foreign job seekers more broadly?
- There is likely to be significant discussion on migrant intake targets and strategies. This involves more than setting a ceiling on migrants, but how stringent policy needs to be in targeting industries and directing workers to regional areas in preference to cities.
- Third, there are potential issues for monetary policy. Smaller intake targets will mean job markets remain tight, potentially driving down jobless rates and putting upward pressure on wages. The problem is that ongoing labour shortages may exacerbate price pressures and inhibit efficient operation of certain sectors.
Rewind: The Big Issues for 2021
- Looking ahead into 2021, we highlighted eight issues. And it almost goes without saying that the first issue was “COVID-19”.
- We noted “There is probably not one aspect of our lives that has not been touched by coronavirus. And many of the effects will be long-lasting such as the way we work, study, interact, travel and shop.” And that is probably an appropriate segue to the “Living with Covid” Big Issue for 2022.
- The second issue in 2021 was “The Biden Era” but it is probably fair to say that the issue failed to live up expectations. In short, there haven’t been dramatic changes. Encouragingly, the US economy has kept firing and 2021 is ending with the Federal Reserve starting to wind back monetary stimulus.
- Number three on the Big Issues list for 2021 was: “Monetary policy”. Central banks across the globe have done what it takes to support their economies operate through the crisis. Indeed the last few months have been focussed on exit policies, especially with economies in reasonable shape and supply chain issues leading to an uplift in inflation rates. One regret is that we nominated Inflation as a ‘talking point’ rather than a Big Issue in its own right.
- The fourth issue nominated for 2021 was China. This issue has made the list in different forms for the past six years. In fact in 2020 the issue appeared under the title of the “The road ahead for the Chinese economy”. Last year we wrote: “Apart from goods trade, issues of contention between China and industrial powers include intellectual property rights, Taiwan, territorial claims in the South China Sea, Hong Kong and calls for an inquiry into COVID-19. It is the latter that has led to frictions with Australia and it will be a key focal area in 2021.”
- “Climate change” was the fifth issue on the list for 2021. The issue was never too far away from the centre of attention but the main interest – especially globally – was in the recent United Nations Climate Change Conference (COP 26).
- Sixth on the 2021 Big Issues list was “Jobs”. We noted: “The development of a vaccine(s) raises the prospect of a faster-than-expected economic recovery. And that raises the prospect of the jobless rate returning to 5 per cent quicker than expected.”
- The seventh Big Issue for 2021 was “Economic Inequality”. The main focus of our attention was Covid-19.
- “Migration” rounded out the list of Big Issues for 2021. It was a key issue for a number of sectors in 2021 and it again appears on our Big Issues list for 2022, especially for hospitality, construction and agriculture.
