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SA’s economic recovery on track, but risks ahead: report

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South Australia’s export performance will need to lift to compensate for an expected lag in household and public sector consumption, a new report from University of Adelaide’s SA Centre for Economic Studies says, but its authors believe the state’s economic recovery is set to continue.

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That’s despite inflation and rising interest rates putting increased strain on household budgets, with increased trade and migration expected likely to offset the domestic downturn.

“We expect that the South Australian economy will continue to grow at an above-trend pace in the short term,” the report’s lead author and SACES acting director Jim Hancock said in a statement.

“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 report says that despite a recovering global economy, Russia’s invasion of Ukraine and rising inflation have helped slow the rate of growth.

The report says Australia’s economy has “largely recovered back toward its pre-pandemic trend” but while 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,” the authors found.

Nonetheless, spending by households, businesses and government have all “grown solidly through the last year in South Australia”, and while the volume of overseas exports have not increased strongly, the rate of return has been boosted by strong commodity prices.

The report argues the state’s labour market conditions “remain strong by historical standards”, with employment gains pushing up household incomes.

“Construction activity remains strong in South Australia but has been held back by shortages of building

materials and skilled labour [while] there have recently been unprecedented increases in the cost of key building materials, [such as] steel and timber prices [which] have grown by more than 20 per cent over the past year,” the report found.

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

“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,” he said.

“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.”

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