Welcome to 2022, a year in which predictions about the economy are going to be replete with caveats of “assuming nothing else happens”, which the past two years have shown is a foolish position to take.
But at least we can be certain 2022 will have a federal election. We know this not just because the constitution demands it, but because the latest mid-year economic and fiscal outlook (Myefo) contained a record $16.9bn in “decisions taken, not yet announced”.
This entry in the budget papers is usually large before an election, but the Morrison government in 2018 and last month has taken it to extremes:
So get ready for anything – from another round of car parks to tax cuts – in order to help sway votes.
We also need to get ready for a lot of talk about how strong the economy is.
Whenever you hear this talk, remember two things – interest rates are currently at record lows, and the budget deficit is larger than it was during the GFC:
This is not a bad thing – the last thing we need is a budget surplus, especially when the cost of government borrowing remains at historic lows:
We will no doubt here talk about needing to cut spending and live within our means and return to surplus. And yet all the while, the ability to invest in infrastructure and renewable energy remains as cheap as it was at the last election when government debt was $300bn lower.
But what the record low interest rates and near record deficit means is that talking about the strength of the economy is a bit like measuring how high someone can jump while ignoring that they are using a trampoline.
Clearly Covid has also had a massive impact on how we view the economy – and the election campaign.
While there had been some small chance of an early March election, once Omicron came along, the prospect of an election before Anzac Day reduced greatly:
As Scott Morrison decides we need to “push through,” the question is: what does the future hold for the economy and its impact on the election?
Clearly the impact is large and abrupt.
Last November, ANZ bank’s chief economist was predicting: “In the next six months we’re in for a bit of an economic boom.”
Now ANZ is saying we are spending so little it is like we are acting as though we are in a lockdown.
Retailers generally like to talk about a big Christmas, and the Australian Retailers Association tipped a “record $21 billion to be spent in post-Christmas sales,” but that prediction was made in early December – before Omicron took hold.
Few retailers would be boasting about how great things are right now.
Oddly, however, the Omicron surge has had almost no impact on forecasts for interest rates.
In early November, the market predicted the Reserve Bank of Australia would increase the cash rate to 0.25% by June, and it would be up to 0.75% by this time next year.
That expectation remains unchanged:
This suggests a slight chance of a rate rise in the first week of May, which would certainly be an interesting final twist to the campaign.
Any increase, though, would need to be justified due to inflation increases.
Here we do strike another Omicron snag.
The next official inflation data that comes out in two weeks will only cover up to December – thus missing out on any price rises that are occurring due to labour-supply constraints.
Any current price rises will only be registered in the consumer prices index release in the last week of April – making it one of the big economic data releases expected during the campaign, followed by cost of living data in the first week of May.
Given how cost of living dominates election talk, that could be an unpleasant point for the government – especially if the figures suggest the RBA needs to increase rates on 3 May.
As it is, the inflation expectations remain pretty subdued – and certainly not at a level that requires the Reserve Bank to act:
Importantly, the Reserve Bank is as concerned about wage rises as it is inflation.
On this score, the December Myefo would have you believe good times are ahead, because it forecasts wages to grow by 2.25% in the 12 months to June this year, before rising to 2.75% next year and then 3% in 2024:
However, given the government does not see unemployment falling from June 2023 to June 2025, that does appear to be a rather optimistic view of how wage rises work.
And given there are already suggestions that the Omicron wave will dampen wage growth for a bit longer, as business remains wary of people staying away, it might also be a bit soon to be start banking that pay rise.
It all makes for a weird election campaign. Is the economy strong? Well, yes, if we ignore government spending and low interest rates doing a record amount of help.
It also means that while this year’s election campaign will no doubt focus on the economy, any such debate will be overwhelmingly coloured by the state of Covid.