In an attempt to ease inflationary pressures, the Reserve Bank of Australia (RBA) raised interest rates by 0.5 of a percentage point for the third consecutive month in August, taking the official cash rate to 1.85 percent. The RBA also downgraded the pace of economic growth in 2022 to 3.35 percent from 4.20 percent forecast in May.
Treasurer Jim Chalmers said the consumer price index was tipped to hit 7.75 percent in December before easing to 5.5 per cent at the end of the 2022-23 financial year. The government also downgraded economic growth by 0.5 percent for the current financial year and 2023-24, partly due to rising interest rates.
Shares rebound
The S&P/ASX 200 has made up some lost ground since the start of the current financial year, rising around 5 percent in the past month after three consecutive months of declines. The market has been driven by strong gains in recent weeks by a number of sectors such as information technology, real estate, financials, consumer discretionary and health care. Despite this improvement, the benchmark index remains almost 7 percent lower over the course of 2022.
US economy shrinks
In the US, the economy unofficially fell into recession after it shrank for two consecutive quarters while annual inflation in June struck a 41-year-high of 9.1 percent, driven by an increase in the cost of energy, food and rent. The annual July CPI figure moderated slightly to 8.5 percent. Last month, the Federal Reserve hiked interest rates by 0.75 percentage points for the second consecutive month. The European Union, UK, Canada and New Zealand are among some of the other countries that have also been lifting interest rates.
By raising interest rates, central banks make it more expensive for consumers and business to borrow money for loans, often forcing them to reduce spending elsewhere. By spending less, the economy cools and inflationary pressures ease.
US gross domestic product (GDP) fell at an annualised rate of 0.9 percent in the second quarter, following a 1.6 percent decline in the first three months of the year. While two quarters of negative growth are usually defined as a recession, US authorities and economists say that is not the case, primarily because of the strong labour market and low unemployment rate. Technically, an official recession has to be declared by the US National Bureau of Economic Research.
Regardless, a downturn in the US economy would have consequences for Australia as well as the rest of the world.
Tight labour market
On a positive note, unemployment in Australia fell to a new 48-year low of 3.5 percent – its lowest since August 1974 when the jobless rate was 2.7 percent. However, the latest government forecast is for unemployment to tick up to 3.75 percent by next June and 4 percent in mid-2024. The RBA warned that higher inflation and weaker economic growth due to higher interest rates will likely result in an increase in the jobless rate.
