Economic Snapshot Update

Reading Time: 2 minutes

Anneke Thompson, Chief Economist at CreditorWatch, comments on The Reserve Bank of Australia’s (RBA) penultimate cash rate decision before the Federal Election which has determined the Official Cash Rate (OCR) should remain unchanged for at least one more month.

“Despite three consecutive quarters of inflation being on or above the top range of the official inflation target band, today’s interest rate decision comes as no surprise. It does, however, seem that inflation is here to stay, at least for the short term, and therefore a rise in the cash rate is imminent. In terms of Federal Budget impacts, cash splashes in the form of petrol savings and extra tax cuts for low and middle-income workers will work to move money through the economy, at least temporarily. However, it remains to be seen if households will spend this money or will squirrel it away as a cushion against future higher home loan rates.

“CreditorWatch data highlighted in the Business Risk Index (BRI), has revealed repeat industry offenders when it comes to blown-out payment times and the probability of businesses defaulting – namely the hospitality sector and construction industry. We know the hospitality sector is largely made up of SMEs and with high-profile company collapses in the construction sector such as Privium, Probuild and Condev, it appears businesses are now at increased risk of default following years of government support, chiefly in the form of JobKeeper.

“Higher input and logistics costs coupled with future cash rate increases will weigh heavily on what is already a challenging operating environment for SMEs. Trade receivables data from CreditorWatch show that B2B trade is substantially down on pre-Covid levels – with the downward trajectory accelerating throughout 2021. Trade receivables in February 2022 were down 37 per cent compared to the year prior. This data indicates that while big business may be benefitting from increased spend following the release from lockdowns, the smaller end of town is still struggling to recover. Continued flooding in NSW and QLD may be a further impediment to trade receivables returning to pre-Covid conditions..”

“That being said, Australia’s employment growth has been a shining light for the economy, the strength of which is fuelling wage growth forecasts. The Economic Outlook section of Budget 2022/23 forecast growth in the Wage Price Index (WPI) of 2.75 per cent through to June 2022, rising to 3.25 per cent by June 2023. Even higher wage growth is forecast once bonuses, promotions and other measures of labour elasticity are factored in.

“With this in mind, an interest rate rise appears imminent but the velocity and speed of increases are still very uncertain. While inflation is a key target for the RBA, full employment is another. Having just reached full, or close to full employment, it’s highly unlikely the RBA will choose to threaten this status by raising the cash rate too quickly. A steady approach is a more likely scenario, with small rises spaced out as the RBA monitors the impact of each rate rise as they occur.”