Economic Headwinds in Australia: How China’s Rates and Growth Could Impact the Economy in 2023

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Beijing’s attempts to suppress the spread of Covid-19 and the Reserve Bank’s decisions surrounding interest rates will be primary sources of difficulty in 2023.

One thing you can be sure of for 2023, and any year: is that many forecasts will miss the mark – especially those about economics and financial markets.

Daniel Kahneman, a Nobel laureate in economics and author of Thinking, Fast and Slow, expresses that “all is clear after the event…This illusion of knowledge about past events gives us too much assurance in our capability to anticipate what may happen next.”

The year ends, and with little market-moving economic news in western economies, we get a chance to examine the inaccurate predictions of the past twelve months and learn lessons for what’s ahead.

Recently, Bloomberg highlighted the “harsh consequences” for Wall Street’s top players in failing to gauge inflation risks correctly. 

Moreover, The Economist has labelled 2022 a “crushing year of inflation”, predicting that this could lead to heightened unemployment levels over the next twelve months due to elevated official interest rates and their effect on global demand.

In Australia, the economy is likely to be affected by China’s growth and interest rate policy – as it has been in recent years. China is Australia’s biggest trading partner, so when their economy slows or enters a recession, it can directly affect local employment and economic activity.

For 2023, the most significant risk lies in the monetary policy decisions made by the People’s Bank of China. If the Chinese central bank raises interest rates and tightens liquidity conditions, it could decline export demand for Australia and other commodity-based economies.

Another potential risk is that China’s growth continues to slow – which could then reduce demand for Australian exports. This could lead to an increase in unemployment and a decrease in economic activity.

There is also a risk of higher input costs associated with global inflationary pressures that would likely affect the cost of living for Australians and their purchasing power – potentially leading to slower domestic consumption growth.

“It is important to monitor what China does closely,” says Dean Paatsch, chief economist for the Business Council of Australia. “If inflationary pressures become too great and monetary policy is tightened aggressively, it could affect Australia’s growth trajectory.”

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