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Economic growth figures out this week were ugly

- June 7, 2024 6 MIN READ
Economic figures are ugly

Leading into COVID we were on a world record-breaking run of consecutive quarters of positive economic growth. Since the lockdowns finished the Australian economy has been tough going.

Economic growth figures out this week were ugly – up just 1 per cent for the quarter and just 1.1 per cent for the year. Remember, this measures the March quarter; it’s now June and economic data since the end of March until now has been even weaker.

Annual growth dropped from 1.6 per cent in the December quarter to 1.1 per cent just three months later. It is the slowest economic growth since the March quarter 1992 (outside of the COVID pandemic) and was well below the decade average rate of 2.4 per cent.

Tough going since lockdowns

Leading into COVID we were on a world record-breaking run of consecutive quarters of positive economic growth. Since the lockdowns finished it has been tough going.

This latest figure may still be a positive but it includes the impact of 500,000 new migrants into the country. Take their contribution and compare like with like against this time last year and we’d be in an economic recession.

That’s why it feels like a recession.

Once inflation was stripped out, Australia’s GDP per capita fell 0.4 per cent in the March quarter and was down 1.3 per cent on the year. The per capita “recession” reflects booming inbound migration, which boosted annual population growth to 2.5 per cent.

The RBA SMP forecasts

Source: IFM Investors

The largest part of the economy is household spending which remained weak, with growth of just 0.4 per cent in the quarter and 1.3 per cent for the year – and that includes the lift in migration.

On these figures, household spending appears to be holding up largely because unemployment is still relatively low. But since the end of March, more current monthly economic data shows retail sales slowing even more and unemployment spiking above 4 per cent.

Households doing their bit

The RBA has wanted Australian households to tighten their financial belts and the national accounts figures show they are doing just that.

Higher borrowing costs, interest payments, personal income taxes and price pressures saw households save less of their income, with the savings rate dipping back to near 16-year lows at 0.9 per cent in the March quarter. Total savings remained below 2 per cent for the year, for the first time since the March quarter 2008, around the time of the Global Financial Crisis.

Household payments % of gross income

Source: ABS

Household saving ratio

Source: ABS

Household income received grew at its lowest rate since December 2021. But interest paid on mortgages did ease to 3.9 per cent in the March quarter, the slowest quarterly pace in two years which reflected the cash rate staying on hold and borrowers refinancing for a better deal.

That’s a strong message for everyone. As I constantly say, when times are tough analyse every major financial commitment and bill to ensure you’re on the best deal. Loyalty does not pay…

RBA getting the stick ready

Reserve Bank Governor Michele Bullock had a lot to say to the Senate Economics Committee yesterday. As the nation’s financial therapist her appearance was an important soap box to get into the psyche of all Australians.

Economies and economic data are a reflection of our behaviour and she wants to influence that behaviour. Right now she’s using the old carrot and stick strategy.

You all be good boys and girls, keep those financial belts tight and stay in the bunker so inflation keeps coming down.

If we don’t toe the line then the stick comes out: “But if it turns out, for example, that inflation starts to go up again or it’s much stickier than we think we’re not getting it down, then we won’t hesitate to move and raise interest rates again,” Bullock told the Senate.

It doesn’t get much clearer than that. Think the infamous Soup Nazi in the Seinfeld TV series: “no rate cuts for you”!

No rate cuts for a while yet

Because that is what Bullock is saying: no rate cuts for us for quite a while. Forget any cuts before the end of the year. There is now every likelihood of rate INCREASES.

Financial markets have been thrown into a spin and are now expecting another 0.25 per cent rate rise, with a 50-50 probability of it happening in December, which would take the cash rate to 4.6 per cent. Any rate cuts are now not expected until at least around this time next year or even later in 2025.

Some of the gloomier economists are expecting 2-3 rate rises before the end of this year. That would be devastating for so many Australian families.

Interest paid on housing debt up 172 per cent

We’ve endured the shortest, sharpest interest rate cycle of hikes in over 50 years and yesterday’s National Accounts shows just how devastating that cycle has been. Interest paid on housing debt is up by 30.8 per cent over the past year because so many borrowers have come off their low fixed rate loans. Since the pandemic, interest paid on housing debt is up by a massive 172 per cent.

Not only are family budgets getting squeezed by this 172 per cent rise in home loan repayments, but the housing shortage also continues to push home prices higher. As a result, most housing markets around the country are at their least affordable in history.

All levels of government have to act in unison to solve the housing crisis because it is one of the major reasons inflation is not coming down as quickly as the RBA would like.

Construction far lower than needed

Rents and construction costs are staying stubbornly high and there looks to be no solution in sight. We need 250,000 new properties to be built every year to keep the property market in balance and make sure there is enough new housing supply to meet demand and keep values stable.

The facts are that just 170,000 new homes were built last year, 160,000 are expected over this year and building approvals for future new homes are at 10-year lows. There just aren’t enough new homes coming down the pipeline to meet demand for a number of years to come.

It really is a crisis and it’s feeding inflation.

Inflation ticking back up

While inflation has come down from its peaks, it hasn’t come down far enough. The RBA is absolutely determined to get inflation down to that 2-3 per cent band. It dropped to 3.4 per cent in December and everyone cheered expecting it would get to within the band quickly and we’d be rewarded with a cut in interest rates.

But in April inflation ticked back up to. 3.6 per cent… so near and yet so far. It’s that last little bit of slowing inflation which is proving stubborn and what the RBA is determined to overcome. Unfortunately, interest rates are the only weapon they can use.

The problem is the RBA doesn’t want to use the interest rate stick too much and tip the economy into recession. It’s a tricky situation for Bullock.

Economy teetering on the edge

As yesterday’s National Accounts show, the economy is teetering on the edge. Economic growth at 0.1 per cent for the March quarter is anaemic. The building and construction sector is collapsing under soaring construction costs and building companies are going broke.

“In contrast, if it turns out that the economy is much weaker than expected, and that puts more downward pressure on inflation, then we’ll be looking to ease so they’re the [Plan B] if you like, but they’re central to the strategy.”

That was an important comment from yesterday’s Senate Economic Committee testimony from Bullock because while the RBA charter is to keep inflation under control, that charter also includes maintaining full employment. So, the RBA is aiming to bring inflation back to target over the coming two years while keeping unemployment as low as possible.

While everyone is focusing on the fight against inflation, the economy is weak and unemployment is slowing rising. It broke up through 4 per cent last month to 4.1 per cent.

Economic history tells us that when economies weaken, unemployment initially rises slowly but then accelerates quickly. The question is whether we have reached that tipping point and saving jobs becomes more important than getting inflation down that little bit further to within the desired 2-3 per cent band.

I have a feeling future rate cuts could come because of unemployment rather than inflation. Watch this space.


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