Why the price of lettuce is not the only issue facing Labor

As a major agricultural and resources exporter, Australia clearly gets the benefits as well as the costs of high prices and shortages.

According to this week’s economics forecast from the Australian Bureau of Agricultural and Resources, Australia’s agricultural exports are expected to reach a record $65 billion in the coming financial year. All forecasts should now be accompanied by warnings they can’t be relied upon, of course. But global conditions setting such extreme prices for exports such as grain and beef are unlikely to evaporate.

And compared to other countries across the Asia-Pacific, Moody’s “piping hot food inflation” analysis also has the Australia domestic increase over the past year remaining relatively modest at below 3 per cent. New Zealand’s food inflation rate is more than double that, for example. Prime Minister Jacinta Ardern might be tempted to stock up on her visit to her new neighbour this week.

Naturally, the National Farmers Federation is already warning increased prices of energy and a shortage of fertiliser will flow into farm costs and production.

But for the agricultural industry – like the resources industry – it’s still more an issue of managing particular problems in a generally positive picture.

As the election demonstrated, however, a strong national economic story doesn’t provide permanent political insulation – especially from consumers and producers feeling the tug on their individual budgets.

Most economists are now in sombre agreement the Reserve Bank’s decision this week to raise the cash rate by 0.5 per cent – more than expected – was the correct move. It’s not considered logical for a central bank belatedly trying to curb inflation to be influenced by the pain of new home buyers facing the unhappy combination of declining prices and rising interest rates with little savings buffer built up. Bad luck.

That economic equanimity will still be tested by the certainty of more rises to come – possibly just as big.

Reserve Bank governor Philip Lowe may have gone too long in keeping rates low to get the unemployment rate down.

Australian banks have always emphasised the resilience of mortgage customers whose capacity to pay considerably higher rates is stress tested at the time of borrowing. The market’s apprehension about how this will work in practice has again been on show after bank share prices were smashed this week.

The key probably is what happens to the unemployment rate. With businesses desperate for new employees and unemployment at a near half-century low of 3.9 per cent, this hardly seems the most pressing problem unless a global recession beckons. That’s still considered less likely than not.

For now, Reserve Bank governor Philip Lowe may have gone too long in keeping rates low to get the unemployment rate down. But the mix of demographics and labour shortages means a sudden surge in job losses looks improbable.

Unlike the American market, Australian borrowers also end up with the same level of debt if they quit their mortgages. That is backed by the one-way direction of the Australian housing market over decades, and the unpalatable alternative of high rents. The result is most borrowers, no matter how stretched, do whatever it takes to keep up with payments. Banks are also now more adept at long-term plans for customers in trouble without forced sales.

The greater uncertainty is what this rate squeeze – and falling house prices – do to economic activity and consumer and business confidence overall. So far, this is holding up despite the campaign rhetoric of crisis. Most Australian businesses remain optimistic despite a slowdown coming. Who really knows?

Australian inflation is expected to go higher, perhaps even more than the 8 per cent-plus rates of other developed economies. Most central banks are all trying to readjust to the end of the low interest rate world without tipping their economies into recession – just as governments are also trying to pull back on their level of deficit spending.

It means the first Labor government budget now planned for October 25 will be another extraordinary balancing act. Treasurer Jim Chalmers insists Labor will deliver on its limited commitments in areas such as childcare and medicine. He is far more circumspect about additional spending given the pressures on the budget.

Post-election, Treasury secretary Steven Kennedy is willing to say the obvious. Tax reform and a severe pruning of social spending are required, particularly given the budget legacy of COVID-19 emergency support has ended.

Chalmers constantly refers to a budget “heaving with $1 trillion of Coalition debt”. By October, it will become Labor’s debt – still heaving.