Budget paints upbeat picture of post-pandemic recovery

The federal budget forecasts strong economic growth, low unemployment and rising wages growth but the ongoing coronavirus pandemic and war in Ukraine pose lingering threats to the rosy assessment.

The economy is forecast to expand by a robust 4.5 per cent this financial year, up from the 3.75 per cent tipped in December, to be followed up by a healthy 3.5 per cent in 2022-23.

The budget forecasts the jobless rate to fall to 3.75 per cent in the September quarter of 2022 and remain at that level until the end of 2024-25.Credit:Mayu Kanamori

“Now that pandemic-related activity restrictions have been wound back and vaccination, along with improved treatment options, are the primary tools for managing the virus, the conditions are in place for a sustained economic recovery,” the budget papers say.

A sustained upswing in overseas migration following the reopening of the international border will underpin consumption growth and dwelling investment. The budget predicts net overseas migration to surge from just 41,000 people this financial year to 235,000 in 2024-25.

“The reopening of international borders will see the return of migrants and international students, supporting growth in consumption and education exports and assisting in filling skill gaps,” the budget says.

Australia has been affected by global inflationary pressures including elevated oil prices and supply chain disruptions. But the budget anticipates inflation here will peak well below most other advanced economies. It forecasts the consumer price index to hit 4.25 per cent through the year to the June quarter of 2022 before moderating to 3 per cent next financial year.

The fuel excise reduction of 22¢ a litre announced in the budget is expected to reduce headline inflation by 0.25 of a percentage point in the June quarter of 2022, before being withdrawn in late 2022 as oil prices are expected to moderate.

Subdued wages growth, which has eroded the spending power of households for years, will persist this financial year. The budget predicts that will pick up to 2.75 per cent in the year to June, well below the inflation forecast of 4.25 per cent.

But the budget is forecasting a return to real wages growth in 2022-23, when wages are tipped to rise by 3.25 per cent versus an inflation rate of 3 per cent.

The budget says broad wage measures are now “picking up more quickly as workers take advantage of the tight labour market”.

This optimistic forecast follows almost a decade during which official forecasts have consistently overestimated the strength of wages growth. The budget papers acknowledge there is “significant uncertainty around the pace at which wages growth will accelerate” given the unemployment rate is at a historically low level.

Employment has made a strong recovery following lockdowns and other pandemic upheavals, with the unemployment rate falling to a multi-decade low of 4 per cent in February. The budget forecasts that rate to fall to 3.75 per cent in the September quarter of 2022 and remain at that level until the end of 2024-25.

But a range of domestic and international factors threaten the budget’s upbeat outlook. It warns the pandemic will pose an economic risk for some time.

“The potential emergence of new, more virulent or vaccine-resistant variants of COVID-19 is still a substantial downside risk to the domestic economy,” it says.

Global supply and demand are especially vulnerable to health developments in China, Australia’s biggest export market.

“While most countries have adapted to living with the virus, China has not yet experienced widespread community transmission,” the budget says. “Recent COVID-19 outbreaks in China’s port cities and manufacturing regions have demonstrated these risks associated with more widespread transmission, which would also add further pressure to already strained global supply chains.”

The Russian invasion of Ukraine also threatens economic damage on a global scale. As an energy and food exporter with limited direct trade exposure to Russia, Australia is better placed than many countries to absorb the economic effects of the conflict and associated disruptions. But the budget warns “an extended conflict or an escalation that more significantly impacts global energy supply and global growth, is a downside risk to Australia”.

Jacqueline Maley cuts through the noise of the federal election campaign with news, views and expert analysis. Sign up to our Australia Votes 2022 newsletter here.

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