In purely economic terms, the upcoming Federal election is extremely unusual. The shut down of the Australian economy for almost two years because of health measures really has no precedent in our history. Only war can produce that type of shock.
The Federal government’s financial response was as extreme as the state of emergency measures, including a sharp increase in Australian government debt. It remains to be seen, however, if the government gets much credit for injecting so much free money into the economy. It is unlikely. When Labor prime minister Kevin Rudd did something similar during the financial crisis of 2007-08 with his so called ‘cash splash’ he got little recognition for acting fast and keeping Australia, uniquely in the developed world, out of recession.
The economic focus is instead likely to be on two types of inflation: asset inflation (especially rising house prices) and consumer price inflation. For most of this century the Australian economy has been a battleground between those two forces, with asset inflation winning easily.
For about two decades CPI inflation has been quiescent, allowing the Reserve Bank to bring in steadily lower interest rates. There were many reasons for this, one of which was the efficiency of cross-border supply chains. In the aftermath of the pandemic those supply chains have started to come apart and it is not clear if they will return in the same form.
Thus the game came to an end when the country recorded the largest quarterly and annual increase in inflation since 2000. The CPI rose 2.1 per cent in the March quarter and came in at 5.1 per cent annually. The Reserve Bank has responded by increasing interest rates by 0.25 per cent, the first jump in over 11 years.
'Australian households are amongst the most indebted in the world. In the third quarter of 2021, Australia’s household debt-to-GDP ratio was 119 per cent.'
For those with large mortgages, a return to interest rate levels more like the historical average is a chilling prospect. The current rate of 0.35 per cent is still very low but it is likely to be heading higher, as indicated by the fact that the Australian 10 year bond rate has hit 3.56 per cent. Last August it was only 1.06 per cent.
Australian households are amongst the most indebted in the world. In the third quarter of 2021, Australia’s household debt-to-GDP ratio was 119 per cent, second only to Switzerland’s 131