The media are always setting “tests” that the government – or the opposition – must pass to stay on top of its game. But this year, it’s the Reserve Bank facing a big test: will it crash the economy in its efforts to get inflation down?
There’s a trick, however: when the Reserve stuffs up, it doesn’t pay the price, the elected government does. This asymmetry is the downside of the modern fashion of allowing central banks to be independent of the elected government. Everything’s fine until the econocrats get it badly wrong.
It’s clear from last week’s national accounts that the economy has slowed to stalling speed. It could easily slip into recession – especially as defined by the lightweight two-successive-quarters-of-negative-growth brigade – or, more likely, just go for a period in which the population keeps growing but the economy, the real gross domestic product, doesn’t, and causes unemployment to keep rising.
Because interest rates affect the economy with a lag, the trick to successful central banking is to get your timing right. If you don’t take your foot off the brake until you see a sign saying “inflation: 2.5 per cent”, you’re bound to run off the road.
So now’s the time to think hard about lifting your foot and, to mix the metaphor, ensuring the landing is soft rather than hard.
Here’s a tip for Reserve Bank governor Michele Bullock. If you get it wrong and cause the Albanese government to be tossed out in a year or so’s time, two adverse consequences for the Reserve would follow.
First, it would be decades before the Labor Party ever trusted the Reserve again. Second, the incoming Dutton government wouldn’t feel a shred of secret gratitude to the Reserve for helping it to an undeserved win. Rather, it would think: we must make sure those bastards in Martin Place aren’t able to trip us up like they did Labor.
Last week’s national accounts told us just what we should have expected. They showed that real GDP – the nation’s total production of goods and services – grew by a negligible 0.2 per cent over the three months to the end of December.
This meant the economy grew by 1.5 per cent over the course of 2023. If that looks sort of OK, it isn’t. Get this: over the past five quarters, the percentage rate of growth has been 0.8, 0.6, 0.5, 0.3 and 0.2. How’s that for a predictable result?
Now you know why, just before the figures were released, Treasurer Jim Chalmers warned that we could see a small negative. It’s a warning we can expect to hear again this year.
If you ignore the short-lived, lockdown-caused recession of 2020, 1.5 per cent is the weakest growth in 23 years.
But it’s actually worse than it looks. What measly growth we did get was more than accounted for by the rapid, post-COVID growth in our population. GDP per person fell in all four quarters of last year.
So whereas real GDP grew by 1.5 per cent, GDP per person fell by 1 per cent. We’ve been in a “per-person recession” for a year.
It’s not hard to see where the weaker growth in overall GDP is coming from. Consumer spending makes up more than half of GDP, and it grew by a mere 0.1 per cent in both the December quarter and the year.
At a time when immigration is surging, and it’s almost impossible to find rental accommodation, spending on the building of new homes fell by more than 3 per cent over the year.
Of course, this slowdown is happening not by accident, but by design. Demand for goods and services had been growing faster than the economy’s ability to supply them, permitting businesses of all kinds to whack up their prices and leaving us with a high rate of inflation.
Economists – super-smart though they consider themselves to be – have been able to think of no better way to stop businesses exploiting this opportunity to profit at the expense of their customers than to knock Australia’s households on the head, so they can no longer spend as much.
For the past several decades, we’ve done this mainly by putting up interest rates, so people with mortgages were so tightly pressed they had no choice but to cut their spending. The Reserve began doing this during the election campaign in May 2022, and did it again 12 more times, with the last increase as recently as last November.
It would be wrong, however, to give the Reserve all the credit – or the blame – for the 12 months of slowdown we’ve seen. It’s had help from many quarters. First is the remarkable rise in rents, the chief cause of which is an acute shortage of rental accommodation, affecting roughly a third of households.
Next are the nation’s businesses which, in their zeal to limit inflation, have raised their wages by about 4.5 percentage points less than they’ve raised their prices. Talk about sacrifice.
And finally, there’s the federal government, which has done its bit by restraining its spending and allowing bracket creep to claw back a fair bit of the inflation-caused growth in wage rates. As a consequence, the budget has swung from deficit to surplus, thereby helping to restrain aggregate demand.
It’s the help the Reserve has had from so many sources that risks causing it to underestimate the vigour with which spending is now being restrained. It’s far from the only boy standing on the burning deck.
Last week some were criticising the Reserve for popping up in November, after doing nothing for five months, and giving the interest-rate screws another turn while, as we now know, the economy was still roaring along at the rate of 0.2 per cent a quarter.
The critics are forgetting the politics of economics. That isolated tightening was probably the new governor signalling to the world that she was no pushover when it came to the Reserve’s sacred duty to protect us from inflation.
In any case, a rate rise of a mere 0.25 per cent isn’t much in the scheme of things. It’s possible that quite a few hard-pressed home buyers felt the extra pain. But when did anyone ever worry about them and their pain? It was the central bankers’ duty to sacrifice them to the economy’s greater good – namely, preventing the nation’s profit-happy chief executives from doing what comes naturally to all good oligopolists.
The looming stage 3 tax cuts should give a great boost to the economy, of course, provided seriously rattled families don’t choose to save rather than spend them.
What matters most, however, is by how much unemployment and underemployment rise before the economy resumes firing on all cylinders. So far, the rate of unemployment has risen to 4.1 per cent from its low of 3.5 per cent in February last year.
By recent standards, that’s still an exceptionally low level, and a modest increase in the rate. But for a more definitive assessment, come back this time next year.