University of Adelaide: SA economic recovery to continue despite cost of living crisis

South Australia’s economic recovery is set to continue despite inflation and rising interest rates putting increased strain on household budgets.

Aggregate spending within the state has grown strongly over the past year in response to strong growth in household consumption and public consumption spending, and a solid, though lockdown-interrupted, rise in dwelling investment. But with household and public sector consumption expected to weaken, the State’s export performance will need to improve to compensate.

These conclusions are contained in the latest Economic Briefing Report prepared by economists from the University of Adelaide’s SA Centre for Economic Studies (SACES).

“We expect that the South Australian economy will continue to grow at an above trend pace in the short term,” says Mr Jim Hancock, Executive Director (acting), South Australian Centre for Economic Studies, the University of Adelaide.

“Household spending growth is likely to slow in response to cost of living pressures. But reopening of the nation’s borders will facilitate a recovery in overseas migration which will provide a boost to population growth going forward. It will also help to relieve the inflationary pressures that come from very tight labour market conditions.”

The SACES report highlights:

The global economy continues to recover but it is growing more slowly than was expected six months ago as a consequence of Russia’s invasion of Ukraine and intensifying inflationary pressures.
Australia’s economy has largely recovered back toward its pre-pandemic trend and is now operating at a very high rate of capacity utilisation, particularly in respect of the labour market.
While Australia’s export prices have boomed, little of the associated boost to incomes has flowed through to Australian households.
With inflation and interest rates now adding to the strain on households’ budgets, households’ confidence about the economic outlook has fallen, so households are likely to take a more cautious approach toward discretionary spending.
Spending by households, businesses and government have grown solidly through the last year in South Australia.
The volume of overseas exports form South Australia had not increased much through the year, but export values have been boosted by strong commodity prices.
South Australian labour market conditions remain strong by historical standards.
Households’ incomes in South Australia have had support from a strong rise in employment. A rise in wages growth has also helped, although it is not sufficient to keep up with inflation.
Construction activity remains strong in South Australia but has been held back by shortages of building materials and skilled labour.
There have recently been unprecedented increases in the cost of key building materials; for example steel and timber prices have grown by more than 20 per cent over the past year.
“We expect that the South Australian economy will continue to grow at an above trend pace in the short term. Household spending growth is likely to slow in response to cost of living pressures. But reopening of the nation’s borders will facilitate a recovery in overseas migration which will provide a boost to population growth going forward.”
Jim Hancock, Executive Director (acting), South Australian Centre for Economic Studies.

However, there are significant risks to the outlook.

“The global recovery has become increasingly vulnerable, with downside risks multiplying,” says Mr Hancock.

“Any worsening of the war in Ukraine would generate further disruptions and it is not yet clear how much global growth will slow as overseas interest rates are increased to curtail global inflationary pressures.

“In Australia, the Reserve Bank of Australia faces a delicate balancing act with monetary policy; it needs to return real interest rates to a neutral level with some haste.

“But borrowers have become accustomed to cheap credit and raising rates too far increases the risk of defaults and a major downturn in the housing market.”