For three quarters – nine months in other words – the economic output has been going backwards in per-capita terms, but that is set to translate into sharply lower inflation and, with a little luck, some easing in the cost-of-living pressures that have dogged Australian consumers in recent years.
Indeed, when the December inflation data are released at the end of January, we should see the annual inflation rate drop to 3.5 per cent, or less, as the weak economy squeezed price pressures and kept consumer sentiment hovering at recessionary levels for the bulk of the past year.
In terms of the hard data, the economy – GDP – grew by just 0.2 per cent in the September quarter after rising by 0.4 per cent in the June quarter and 0.5 per cent in the March quarter.
At face value, the figures don’t look too bad and a recession avoided – the economy has grown in each of the past three quarters. But when you take into account population growth, which has surged as the international borders have reopened, GDP per capita over the past three quarters has been 0.0 per cent, -0.2 per cent and -0.5 per cent.
It’s a per-capita recession, in other words.
Making matters worse for the future, the household saving ratio has collapsed to 1.1 per cent – the lowest level since 2007 – with householders adding very little to savings as they struggle to cover the effects of falling real wages and rising interest rates. And this coincides with household spending growth tracking near all-time lows.
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It means the savings buffer the Reserve Bank (RBA) reckoned would support household spending in the face of the interest rate hikes has almost disappeared.
These were some of the reasons why the RBA left interest rates unchanged at 4.35 per cent when it met earlier this week. It can see the economic weakness coming through from the prior excessive tightening in monetary policy.
Another critical reason for the RBA keeping rates unchanged is the inflation rate is free-falling on the back of the weaker growth performance of the economy revealed in the GDP data.
December inflation could drop below 3.5%
The RBA is not yet convinced that inflation will be in its target of 2-3 per cent in a timely manner, even though some simple modelling of the links between economic growth, the labour market and inflation are pointing to its target being hit in the next few quarters.
Already, the annual inflation rate has dropped from a peak of 8.4 per cent in December 2022 to 4.9 per cent in October 2023. Over the next two months, with signs of falling prices for some foodstuffs and petrol – among other things – it is likely annual inflation will ease to a rate below 3.5 per cent when the December 2023 monthly data are released in late January.
This is just before the next meeting of the RBA and, given this will accompany the poor economic growth rate in the September quarter, the RBA should not only drop its so-called bias to increase interest rates, but it should flag a scenario where it would consider a modest interest-rate-cutting cycle for the first half of 2024.
Financial markets are embracing this view, despite the RBA rhetoric on ‘sticky services inflation’ or some such obscure narrative. Not only are interest rates expected to be on hold for the next six to nine months, but the market is pricing in the start of a rate-cutting cycle in the second half of 2024 – the reasons for which are as plain as the nose on your face.
The economy is weak. Inflation is falling. The unemployment rate is trending up. Global conditions are increasingly problematic.
The RBA needs to wake up to these facts and set policy to avoid things getting even worse in 2024.
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