Early signs of fourth wave omicron and rate hikes choke economy

Many Australians have itchy feet right now.

Westpac data shows Australians are making the most of open borders, with consumer spending on credit cards for airlines and hotels rebounding by more than 140% and 120% respectively, since a sharp drop in 2020.

Perhaps there is a general urge among the population to escape reality.

It’s not hard to see why, given the latest official wage data.

Data from the Bureau of Statistics shows that a wave of workers are now managing higher expenses with lower pay.

The ABS measures the total amount of wages paid to workers on a weekly and monthly basis, based on data provided by employers.

Australians are flocking abroad, even though they earn less. (PA: Diego Fedele)

In April, May and June, wages fell – up to 1.8% in May.

This is not related to wage growth, but rather to total wages or employers’ payroll.

In many cases, it’s down because workers without sick leave entitlements have to self-isolate at home or have had to cut back on work for some other reason.

Thus, employers pay less wages to workers on average.

It’s confusing, isn’t it? Because unemployment is below 4% and wage growth is accelerating, according to the Reserve Bank.

The reality, economists say, is that we may already be seeing the first signs of a broader economic downturn.

“While the gout [in wages] partly due to the impact of flooding, COVID-19 and flu outbreaks, [we] Watch for total wages falling closely as this could be an early sign of general weakness in the economy in response to high inflation and rising interest rates,” says Angela Jackson, Impact Chief Economist. Economics and Policy.

Let’s explore what’s going on.

Australian dollar down

One of the first indicators of a slowdown in Australian economic growth is the Australian dollar.

This week, the Australian dollar fell below 68 US cents and edged closer to a two-year low as commodity prices fell.

The value of the Australian dollar is largely determined by movements in the prices of commodities like oil, iron ore, coal, aluminum and zinc – and they are all falling.

On Tuesday, for example, the price of iron ore fell below $110 for the first time since 2021, as the world was still recovering from the first Omicron wave.

Commodity prices are falling because there is genuine fear that the Chinese economy will remain weak until next year and the US economy will slide into recession.

If these economies falter, of course, there will be less demand for commodities (hence lower prices).

But the dollar is also considered an indicator of the global economic environment. Generally speaking, the rosier the outlook for the global economy, the better the Australian dollar is doing.

“Its weakness against the U.S. dollar doesn’t say much about our economy, but it is indicative of investor concern about the global economy and China in particular,” the strategist said. Westpac’s chief currency officer, Sean Callow.

And let’s not forget the impact that different countries’ interest rates have on the value of their currencies.

Despite considerable increases in the Reserve Bank’s interest rate, other countries, particularly the United States, have been more aggressive in their monetary policy.

Investment dollars are attracted to countries where interest rates are relatively higher.

This brings the conversation back to inflation.

Inflation is not moving… yet

Australia has an inflation problem right now, like most other developed countries.

The Reserve Bank of Australia says much of it is generated overseas, but the bank also finds that inflation is rising locally as well.

“Global factors explain much of the rise in inflation in Australia, but domestic factors also play a role,” RBA Governor Philip Lowe said.

We know that the war in Ukraine and the pandemic are driving prices up, and neither will go away anytime soon.

Power generation capacity constraints on the east coast are also driving up electricity bills.

And now, again, flooding in NSW food bowls is set to drive up grocery prices even further.

“Flooding is also affecting some prices,” Lowe said.

James Jackson of the NSW Farmers Association goes further, saying, “Food inflation is here to stay.”

These are just symptoms of a much broader economic situation dominated by fears of inflation, rising interest rates and climate change.

Tops of green leaves submerged in brown flood waters
Flooding in vegetable growing regions is contributing to food inflation with no end in sight.(Provided: Paul Grech)

Buyers are lighting up, but for how long?

Surprisingly, the evidence to date shows that shoppers continue to go out and spend in department stores.

The accepted wisdom here is that many employed Australians, with big savings, dip into their deposit accounts to fund those shopping trips.

And that’s OK too, because the RBA says it’s seeing an “increase” in wage growth.

But the latest data from the Bureau of Statistics shows that the amount of money in the pockets of workers is actually falling.

A graph with rising and falling blue lines over time
Wages in June show that the amount of money in the pockets of workers is falling.(Australian Bureau of Statistics)

Ultimately, it starts to get a bit worrisome when a key pillar of the Australian economy (consumer spending) starts to show signs of deteriorating.

This adds to serious concerns for the health of the world’s two largest economies.

Investors are all too aware of these concerns.

A graph showing blue columns of different sizes changing from positive to negative over time.
Things start to get troubling when consumer spending starts to falter, as it is a key pillar of the economy.(Australian Bureau of Statistics)

The equity market is well down from its highs, the property market has turned negative, cryptocurrencies have crashed, and the Australian dollar is hitting two-year lows.

We are actually seeing a similar, but not quite as intense, environment as we saw at the start of the pandemic in 2020.

The problem now is that the government is indicating that it is largely out of the economic stimulus game, and despite big increases in minimum wages and rewards, it is clear that many workers now have less in their pockets, not more .

Interest rates are also rising, as is the cost of living in general.

Many Australians will rightly wonder how they are going to be able to finance their current lifestyle next year without additional help.

Costs are rising and now the income of many Australians is falling.

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