Inflation and interest will sting, but wages should rise in 2023

Dr Michael Shin
Dr Michael Shin

The Australian economy has experienced a strong recovery and is enjoying record-low unemployment, but domestic and international challenges will cast a long shadow over 2023, University of Sydney Business School academics have warned.

High energy prices and supply-chain problems coupled with government stimulus and strong household spending have driven inflation to a decades-high rate in Australia, explain finance lecturers Dr Isaac Pan and Dr Michael Shin.

"The Reserve Bank of Australia is utilising a steadily rising cash rate monetary policy to combat high inflation. The bank expects to increase interest rates further, depending on future economic conditions," Dr Pan said.

"Various concurrent economic factors could remain and challenge consumers and firms in 2023, but also present a path of long-term steady growth for the Australian economy."

Economic challenges: Inflation and interest

The global economy is reeling with inflation not seen in 30 years, while in Australia, it’s predicted to peak at around 7.8 percent, said Dr Shin.

"This is shocking for many of us who have lived through decades of low inflation and low interest rates. We can think of increasing interest rates as our main tool for ’hitting the breaks’ on inflation by helping cool an overheating economy. Other countries such as the U.S. have raised their interest rates even higher and seen inflation drop in response, so there is good reason to believe that the RBA will continue raising interest rates until inflation starts to slow down," Dr Shin explained.

"While currently a necessary evil, higher interest rates tend to hurt homeowners as mortgage payments go up. On a related note, the lacklustre stock market performance and crashing crypto markets may make many Australians more likely to tighten their financial belts moving forward.

Even though Australia has faced an incredible recovery after COVID-19, rising interest rates and the ongoing threat of inflation make the outlook for next year one of pragmatic caution.

Dr Pan said similar patterns hold for businesses of all sizes, where borrowing costs exceed pre-pandemic levels.

"With rising interest rates, new loan demand will drop, and existing borrowers may be forced to prepay or default. These factors could bring additional challenges to the banking sector.

"Monetary policy generally operates with a lag. In 2023, consumers and firms could experience a transitory struggle with high interest rates and inflation. These two adverse conditions could amplify each other and further discourage corporate investment and consumer consumption."

Silver linings: Wages and progress

But it’s not all doom and gloom.

Dr Pan said some drivers of inflation are abating, with energy commodities’ prices declining and China easing its COVID-19 controls - a key contributor to global supply chain issues.

And there’s more cause for optimism, according to Chris F. Wright , Associate Professor in Work and Organisational Studies.

In all likelihood, 2023 will be the year when we finally see wages start to grow again - thanks to government intervention rather than misplaced faith in market forces.

"Real wages growth in Australia has been sluggish for the past decade. For many years the Reserve Bank and the Treasury have assumed that wages would increase once we reached low unemployment. With unemployment now at a 50-year low, it’s clear that this faith in market forces has been misplaced.

"The Albanese government’s Secure Jobs Better Pay bill, passed in December, will encourage workers and employers to bargain. This is likely to drive up wages since workers on bargained agreements have higher pay than those on awards."

Associate Professor Wright said other laws slated for 2023, including those designed to increase immigration and tackle wage theft, could also help boost wages and consumer spending, and thus strengthen the economy - once inflation is under control.

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