SA economic recovery on track, but risks ahead: report

South Australia’s export performance will need to improve to offset an expected slowdown in household and public sector consumption, says a new report from the University of Adelaide’s SA Center for Economic Studies, but the authors believe that the state’s economic recovery will continue.

That’s despite inflation and rising interest rates taxing household budgets more heavily, with increased trade and migration expected to offset the domestic downturn.

“We expect the South Australian economy to continue to grow at a pace that exceeds trend in the near term,” said lead author of the report and Acting Director of SACES, Jim Hancock, in a statement.

“Household spending growth is likely to slow in response to cost of living pressures, but reopening national borders will facilitate a recovery in overseas migration, boosting population growth going forward.

“It will also help alleviate inflationary pressures stemming from the very tight labor market conditions.”

The report says that, despite a recovering global economy, the Russian invasion of Ukraine and rising inflation have contributed to slowing the growth rate.

The report says the Australian economy has “largely recovered towards its pre-pandemic trend”, but while export prices have soared, “little of the accompanying increase in incomes has passed on to Australian households”.

“As inflation and interest rates put pressure on household budgets, household confidence in the economic outlook has declined, so households are likely to be more cautious about discretionary spending,” the authors said.

Nevertheless, spending by households, businesses and government has all grown “solidly in South Australia over the past year”, and while the volume of overseas exports hasn’t risen sharply, strong commodity prices have boosted returns.

The report states that the state’s labor market conditions “remain strong by historical standards,” with employment growth pushing up household incomes.

“Construction activity remains strong in South Australia but was held back by building shortages

materials and skilled labor [while] there have recently been unprecedented increases in the cost of key building materials, [such as] steel and wood prices [which] have grown by more than 20 percent in the past year,” the report said.

But Hancock warns of “significant risks to the outlook,” arguing: “The global recovery has become increasingly fragile, with mounting downside risks.”

“Any worsening of the war in Ukraine would cause further disruptions and it is not yet clear to what extent global growth will slow if foreign interest rates are raised to ease global inflationary pressures,” he said.

“In Australia, the Reserve Bank of Australia faces a delicate balancing act with monetary policy; it has to bring real interest rates back to neutral levels 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.”

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