A customer looks at the price of limes at a fruit stand in Sydney. According to Australia’s Bureau of Statistics, Australia’s inflation rate rose to 6.1 in June, the highest in 21 years.
Lisa Maree Williams | News from Getty Images
The Bank of Queensland said so “quite bullish” on Australia’s “very robust economy” – but not everyone agrees.
“We have a very robust economy that I think when you look at the global challenges, the likelihood that we’ll actually come out of this in good shape is pretty high,” said George Frazis, chief executive of Bank of Queensland, to CNBC. Wednesday.
“That [Reserve Bank of Australia] have moved quite quickly to deal with inflation … that’s why I think there’s a good chance we’ll have a soft landing in Australia,” Frazis said.
RBA last week raised interest rates by 25 basis points to 2.6%, citing the rising cost of living.
“As is the case in most countries, inflation in Australia is too high.” states the Australian central bank. “Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role.”
Frazis cited “very high household savings” and “very low unemployment” as drivers of the robust economy despite pressure on house prices.
“And this is against the backdrop of house prices actually rising by 39% over the last two years,” later clarifying that the figure referred to price increases in Australia between June 2019 and April this year.
Figures from Corelogic, one of Australia’s leading providers of property data, indicates that national Australian house values increased by 28.6% in the past two years. Some capital cities saw price increases of 39% and more.
The focal point of whether or not the housing market will be disrupted, according to Frazis, lies with the unemployment figures, which he said were at an “all-time low”.
“That is our view [unemployment] is likely to continue and is the most important reason for housing being disturbed or not.”
The bank’s chief executive also expressed confidence that Australia is “well supported” against any kind of catastrophic event in the housing market, citing that home owners were saving and getting ahead of repayments.
However, he maintained that disruption to the Australian housing market is “unlikely” to materialise.
However, not everyone has the same optimism as Frazis.
According to a financial stability review at the RBA, Australia’s higher interest rates will increase borrowers’ debt repayments.
The report pointed out that income growth has not kept pace with inflation in Australia and households are left with less capacity to service their debts. In addition, a small proportion of borrowers with high debt and low savings are “vulnerable” to payment difficulties.
“Debt servicing challenges will become more widespread if economic conditions, particularly the unemployment rate, turn out to be worse than expected and house prices fall sharply,” the report continued.
In addition, Assistant Treasurer Stephen Jones warned that Australia’s economy is not “hermetically sealed” from the expected downturn in the international economy, Cloud news reported.
Jones added that the country’s biggest trading partners are in a “precarious” and deteriorating situation, which will affect Australia.
He also noted that when inflation rises, economies around the world slow down. This in turn will have an impact on Australia’s growth forecast.
“We just can’t be complacent about these numbers,” he said.
This was announced by the International Monetary Fund recently a third of the world is headed for recession, which could include economic superpowers such as China and the United States
One economist suggested a modest outlook for Australia’s economy, predicting the country’s growth will slow to around 2%, as opposed to falling into recession.
High household debt in Australia could hurt consumer spending, according to Shane Oliver, chief economist at AMP Capital. But inflation and lower wage growth also meant this risk is lower, he added.
Australian dollar bills of various denominations are arranged for a photograph in Sydney, Australia, Friday, August 4, 2017. High household debt in Australia could risk compromising consumer spending, according to Shane Oliver, chief economist at AMP Capital. But inflation and lower wage growth also meant this risk is lower, he added.
Brendon Thorne | Bloomberg | Getty Images
“While the housing sector is very vulnerable to higher interest rates, actual housing construction should remain solid for some time thanks to a large pipeline of approved but not yet completed housing,” Oliver said.
The economist added that Australia’s gas prices have not risen nearly as much as in Europe, and they are falling Australian dollar will provide a buffer against global weakness.
— CNBC’s Tan Su Lin contributed to this report.