Australia to see strong demand recovery in 2022
The reopening of Australia should see a strong demand recovery through 2022, with 2022 gross domestic product (GDP) growth further upgraded above consensus to 4.4%, but investors assessing the 2022 outlook should be mindful of three key themes.
According to Morgan Stanley’s report “MS Research – 2022 Australia Macro + Outlook: Third Time Lucky Country” investors would need to consider closely scenarios linked to policy paths, reopening and inflation risk management.
“We expect the economy to recover quickly from the lockdown headwinds of 2H21, with easing restrictions being met with strong demand from both consumers and corporates. Government policy will be an important driver of economic activity next year. With a Federal election due by May we expect both major parties to propose deficit-expanding policies which should support broader sentiment,” the report said.
An easing of international border restrictions would also be a key factor, particularly for temporary migrants which historically drove Australia's net migration.
“We assume a faster recovery in net migration, increasing by ~150k in 2022 (~0.6% of population) before normalising to ~250k in 2023 (0.9% of population).”
Further to that, many risks for Australia hinged on the supply side of the economy, with a continued supply chain disruptions and slower easing of international borders being the factors that could potentially lower GDP and increase inflation.
At the same time, a more aggressive migration programme aimed at catching on lost population growth would represent material upside for economic growth.
“The main demand-side risk lies in over-tightening of policy – an earlier than expected shift in fiscal focus to surpluses as well as faster rate hikes from the Reserve Bank of Australia (RBA) would see a sharp reversal in sentiment and spending intentions from both consumers and corporates,” the study said.
Morgan Stanley’s analysts also said they expected the labour market to continue to tighten, even after incorporating a labour supply response from the easing of international borders.
“We expect unemployment to decline to 4.2% by the end of 2022 and 4.0% by end-23 – near historical lows. This will see generalised wage pressures emerge over 2022 and growth moving above 3% in 2023,” the report said.
“For inflation, loosening global supply constraints and strengthening domestic demand see price growth relatively steady in 2022 (core inflation 2.3%Y) before picking up more noticeably in 2023 (2.7%Y).”
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