Impacts still going on Australia’s economic recovery

Economists are warning the rate of wage growth this year may end up below expectations as the Omicron variant of COVID-19 pushes up case numbers and threatens to disrupt Australia’s economic recovery.

After years of stagnant wage growth, economists had been predicting wages would rise by more than 2 per cent during 2022. But those forecasts may be under review, or pushed back to 2023, as economic activity takes a turn for the worse amid supply chain woes and staffing problems sparked by the rapid spread of the virus.

The slowdown in wage growth has been driven by a combination of post-global financial crisis macroeconomic factors such as lower inflation; falls in productivity and job-switching; stubbornly high levels of underemployment; and a drop in trade since the end of the mining boom.

The coming year is set to bring a new era of economic prosperity for the land Down Under, with economists and politicians all spruiking booming growth and further drops in unemployment to historic lows.

But a surge of COVID-19 cases now exceeding 30,000 per day nationally drastically shows uncertainty remains about the pathway to normality.

Test times in excess of four hours and a shortage in supply of rapid antigen test signal the health system is already under strain from a boom in virus numbers. Retails and restaurants are reinforced to close for business due to shortage of staffing.

The World Health Organisation has also flagged hospitals globally would feel additional pressure from the growing Omicron surge. 

However, the majority of economic predictions remain upbeat.

The Mid-Year Economic Fiscal Outlook outlined in December by Treasury, anticipated greater economic activity – free from lockdowns – would see the financial years of 2021-2022 and 2022-23 grow 3.75 per cent and 3.5 per cent, respectively.

Treasury’s most up-to-date forecasts also include further tightening of the labour market and by the end of next year expected to see an unemployment rate in the low per cent range.

That would be the first time since the 1970s where the sustained unemployment rate sat below 5 per cent.

This has significant benefits for governments. More people in the workforce means greater tax receipts and upward pressure on wages, a force the Reserve Bank is keeping a close eye on.

RBA governor Philip Lowe has signalled the central bank’s monetary policy decisions, which includes lifting interest rates, would be influenced stronger than current wages growth and an uptick in inflation.

/ RBA governor Philip Lowe

The RBA is likely to consider a cash rate hike when inflation is within its target range of 2 to 3 per cent.

The current consumer price index, which is the main measure of inflation, sits at 3 per cent for the September quarter. However, the central bank remains cautious the lockdowns are manipulating the numbers.

NAB Economics in December flagged the rise of Omicron was a front and centre threat to destabilising the recovery.

“While we are optimistic (as is the RBA) on growth over the next year or so, a number of uncertainties remain, including the risk from the Omicron variant,” the economics department of the major bank said in a preview.

Rising cases will stress both the health and economic frameworks and a looming federal election fight could see Omicron cash splash promises as the dangling carrot to win votes.