The state of the economy may be dominating headlines and causing panic, but Australia is not experiencing a crisis, Ai Group experts say.
Rather, rising interest rates are a “sensible adjustment” for managing an overstimulated economy — and, for most, standards of living need not be overly affected.
In a special employee briefing, The economy and you, Chief Policy Advisor Peter Burn and Director – Climate Change and Energy Tennant Reed gave Ai Group staff the rundown on the state of the economy, along with tips and advice on how to deal with rising household bills.
Macro issues facing the economy include:
“Things are certainly going on, but is it really a crisis?” Mr Burn said.
“Two years ago, there was a genuine fear we would have 10-15 per cent unemployment, the economy would tank and there would be a high number of Covid-related deaths.
“We didn’t have vaccines yet and there were fears the health system would collapse. We had some of that, but it was nowhere near as bad as the worst-case scenario.”
Government lifelines such as JobKeeper and higher JobSeeker payments, along with low interest rates, largely warded off calamity.
A robust health response to Covid-19 and a rapid development of vaccines also helped.
It meant the accompanying slump in GDP and unemployment was short lived.
“Although we permanently lost what we weren’t producing in that time, we have already made up the level of GDP we were on track to getting to,” Mr Burn said.
“The economy doesn’t need that stimulus anymore. In fact, we have an over-stimulated economy because all that demand and all that money we could borrow to spend (from low interest rates and Government Covid-19 payments) exceeded our supply capacity.
“We didn’t have the ability to produce the goods we gave people money to spend on. Even if we didn’t currently have Covid disruptions and the war in Ukraine, we would still be pushing up against supply constraints.”
The economy is now heading into full employment.
“That is not a bad thing, but with all that money going around and spending going on, we’ve been pushing up prices, given we can’t expand supply to keep up with that,” Mr Burn said.
This has forced the Reserve Bank to normalise interest rates with rate rises, causing significant asset-value adjustments, affecting house prices and super balances.
“It’s a standard impact: when rates rise, asset prices fall and vice versa,” Mr Burn said.
“This is a textbook adjustment to a period of over-stimulation. It’s exactly what you would expect. There is nothing to worry about, it’s a sensible adjustment.
“Households are largely well equipped to manage the increase in payments, partly because of the amount of stimulus handed out and not spent and partly because people took advantage of low interest rates and kept making payments on their loans. If there is more than one income earner, they are hedging their bets, and, in many households, the second earner is now working considerably more hours.”
It is worth bearing in mind that the extent to which house prices have dipped is nowhere near the extraordinary level to which they have risen.
Still, there are some vulnerabilities, particularly for people who recently purchased a house and borrowed a large proportion for it.
They face having to cut spending elsewhere to meet rising payments or potentially, repossession.
“Cutting back in other areas is what the Reserve Bank wants,” Mr Burn said.
“It wants to slow spending growth to bring spending back to the capacity of what the economy can supply.”
Super balances, meanwhile, have fallen in most funds this year but not by a huge amount. It’s a long-term investment and few people will feel the impact.
So, could it get worse?
“The answer is yes,” Mr Burn said.
“Right now, the big risk is that the Reserve Bank interest rate correction could go too far and bring the economy to a screeching halt and maybe go backwards.
“Everyone is alert to it, but it could still happen. The other risk is that prices keep increasing so that they’re not temporary and they could get worse.”
Here are some top tips to manage the rising costs of living:
There is also much we can do to bring down our electricity and gas bills, says Ai Group’s energy expert, Tennant Reed.
Even in a bad market, it pays to shop around. However, be wary of smaller retailers offering exposure to spot electricity prices on the premise you can have more control over what you are paying.
“Some of those smaller retailers have gone bust recently and others have advised customers to leave and get a contract elsewhere in the face of looming price rises,” Mr Reed said.
“Read the fine print carefully.”
Electricity used to be cheapest in the middle of the night, but, increasingly, energy is going to be cheapest in the middle of the day, owing to the proliferation of solar panels.
If your contract exposes you to lower prices in the middle of the day, take advantage of that by programming appliances such as your dishwasher or washing machine accordingly.
Solar is sensible if you own your roof, and it isn’t shadowed. Hold off on home batteries until prices come down.
Around the house:
“We are looking at several years of elevated electricity prices,” Mr Reed said.
“Electricity futures are through the roof; they more or less tripled over the past year. That is going to flow through in time; you are not seeing that on your bills yet. More of that is coming next year.
“The prices we are seeing are higher than those in the whole history of the national electricity market.
On gas, in the wake of the invasion in Ukraine, prices have been surging around the world.”
It’s not all bad news, though . . . if you live in WA.
“Western Australians, you’re doing fine,” Mr Reed said.
“Your prices are not going up to anything like what’s happening in the eastern half of the country.”
Wendy Larter is Ai Group's Communications Manager. She has more than 20 years’ experience as a reporter, features writer, contributor and sub-editor for newspapers and magazines including The Courier-Mail in Brisbane and Metro, News of the World, The Times and Elle in the UK.