It’s been a puzzling week, as we learnt the economy had slowed almost to stalling speed, just a day after the Reserve Bank raised interest rates for the 12th time, and warned there may be more.
According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by just 0.2 per cent over the three months to the end of March.
That took growth over the year to March down to 2.3 per cent, which sounds better than it is because the economy has slowed so rapidly. If it continued growing by 0.2 per cent a quarter, that would be annual growth of 0.8 per cent.
And the resumption of immigration means the population is now growing faster than the economy. Allow for population growth and GDP per person actually fell by 0.2 per cent. Over the year to March, it grew by only 0.3 per cent.
While a growing population is good for businesses – they have more potential customers – to everyone else, economic growth has been sold to us as raising our material standard of living. Not much chance of that if GDP per person is falling.
The Reserve Bank has been trying to slow the economy down because demand for goods and services has been growing faster than the economy’s ability to supply them, thus allowing businesses to increase their prices.
With additional help from the rising prices of imported goods and services, the rate of inflation has shot up. It’s started falling back from its peak of 7.8 per cent at the end of last year, but is still way above the Reserve’s 2 per cent to 3 per cent target range.
The Reserve’s been raising the interest rates paid by the third of households with mortgages, to reduce their ability to spend on other things. But, at this stage, probably the biggest dampener on consumer spending is coming from the failure of wages to keep up with rising prices.
“Demand” means spending, so if households find it harder to spend on goods and services, that makes it harder for businesses to raise their prices, thus bringing the inflation rate back down.
And remember that the full effect of all the interest rate rises we’ve seen is still to be felt. The pain will increase over the rest of this year.
But if I were Reserve Bank governor Dr Philip Lowe, I wouldn’t be too worried that the plan wasn’t working. The biggest single factor driving GDP is consumer spending, which accounts for more than half of all spending. In the June quarter last year, it grew by 2.2 per cent.
The following quarter its growth fell to 0.8 per cent, then 0.3 per cent, and now 0.2 per cent. Wow. I think the squeeze is working.
Although more people have been working more hours, real household disposable income fell by 0.3 per cent in the quarter, and by 4 per cent over the year to March.
It was hit by the failure of wages to rise in line with prices, by the doubling in households’ interest payments, and by the bigger bite that income tax took out of pay rises, caused by bracket creep.
How did households manage to keep their consumption spending growing despite their falling real income? By cutting the proportion of their income that they were saving from more than 11 per cent in March quarter last year to less than 4 per cent this March quarter – the lowest it’s been in about 15 years.
Household investment spending on newly built homes and alterations fell by 1.2 per cent, its sixth fall in seven quarters.
One bright spot was growth in business spending during the quarter of 2.9 per cent, led by spending on machinery and equipment, and non-dwelling construction – particularly on renewables and electricity infrastructure.
Unfortunately, much of the machinery investment was on imported equipment that had been delayed by the pandemic, so it’s not a sign of continuing strength. The volume of spending on imports was a super-strong 3.2 per cent, but imports subtract from GDP, of course.
Treasurer Jim Chalmers always blames the economy’s slowdown on higher interest rates (blame the Reserve, not me), high inflation (not me either) and “a slowing global economy” (blame the rest of the world).
A slowing global economy? Yes, of course. Everyone’s heard about that. Trouble is, the main way the rest of the world affects us is by buying – or not buying – our exports. And the volume of our exports grew by 1.8 per cent in the March quarter, and 10.8 per cent over the year to March. That’s because our miners have done so well (and our fossil-fuel-using households and businesses so badly) out of the higher world coal and gas prices caused by the Ukraine war.
Even so, this quarter’s growth in export volumes of 1.8 per cent has been swamped by the 3.2 per cent growth in import volumes, meaning that “net exports” – exports minus imports – subtracted 0.2 percentage points from the overall growth in real GDP during the quarter.
After Lowe’s decision on Tuesday to raise rates yet again, Chalmers wasn’t mincing his words. “I do expect that there will be a lot of Australians who find this decision difficult to understand and difficult to cop – ordinary working Australians are already bearing the brunt of these interest rate rises, they shouldn’t bear the blame too,” he said.
“The Reserve Bank’s job is to quash inflation without crashing the economy, and they will have a lot of time and opportunities to explain and defend the decision that they’ve taken today.”
Lowe has said repeatedly that he’s seeking the “narrow path” where “inflation returns to target within a reasonable timeframe, while the economy continues to grow, and we hold on to as many of the gains in the labour market [our return to full employment] as we can”.
After seeing the next day’s GDP figures, Paul Bloxham of HSBC bank observed that the narrow path “is looking extremely narrow indeed”. True.
