On 8th November, the RBA increased the cash rate by 25 basis points, to 4.35%, the thirteenth increase in the current cycle. There is always a lag before each round of domestic capacity sapping takes effect, but it is also likely that the length of the lag reduces with each additional interest rate rise.
The reason for this is that each increase takes households closer to the limits of their capacity. They must progressively reduce their expenditure. The big bet from the RBA is whether they are doing just enough with interest rates, or if, as some think happened in November, they might have tipped interest rates over the edge.
If the thesis of diminishing lag timeframes holds true, the November increase will be evident in the December quarter economic growth data, with gross domestic product (GDP) data due to be published early March 2024.
In the meantime, the effects of the previous twelve rises can be seen in the September quarter data which saw growth of only 0.2% or 2.1% on an annualised basis. Of course, interest rates alone have not driven GDP, but they have had a demonstrable impact.
Measured on a per capita basis, economic growth was negative 0.47% in the September quarter, the third negative quarter in a row on that measure. Significantly, the last time that happened was forty years ago, during the 1982-83 recession.
If the economic performance of the nation was recorded and measured by the commentariat on a per capita basis alone, Australia would be in recession.
As the chart below demonstrates, the growth that did occur was ironically fuelled by the change in inventory levels making a positive contribution of 0.4%.
Greg Jericho in the Guardian commented:
“In essence what happened is business did not sell as much stock as they anticipated and so their inventories increased. That is not a great thing, because next quarter we will likely see those inventories run down as businesses decide there is not much point buying more stock given households are not spending.”
However, the position may be more nuanced. As many know, actual inventory levels were skinned through the June quarter, as businesses quit inventories and used the September quarter to return to more balanced supply and demand dynamics. That necessitated some purchasing of stock and for many, their stock positions are in a lot better shape than a few months back.
As Jericho added:
“The other big contributor was the government – both in spending and investment. Take away the government’s contribution and the economy shrank 0.2%.”
Household consumption, typically a major driver of economic activity, is on life support.
Growth in the September quarter was minimal at 0.3%. One reason household consumption was essentially flat was the impact of government subsidies on energy and childcare. The subsidies reduced the amount households had to spend on those items. Ideally that should have spurred spending on other items, but when the RBA is on the attack, households have sensibly kept some of their ammo for the battles to come – like paying for Christmas.
In that context, it is noticeable that the savings buffers built up during the COVID lock downs are now nearly exhausted.
The household saving to income ratio declined from 2.8 to 1.1, the lowest level since December 2007.
According to ABS analysis, household saving declined due to a strong rise in income payable (+6.3%), which experienced its highest growth through the year (+27.9%) since the September quarter of 1977. Income taxes drove the rise in income payable, in the absence of the Low and Middle Income Tax Offset which ceased over 2022-23. Interest on dwellings also contributed to the rise in income payable, as fixed rate mortgages continued to transition to higher variable rates.
The issue now is whether Australia is over the worst.
For instance, the September quarter, inflation, in the form of the consumer price index (CPI) was 5.4%, suggesting the trajectory to return inflation to the RBA target band of 2-3% was too slow, thus prompting the November rate increase. In October, the monthly reporting of the annual CPI was 4.9%, a much faster and more significant decline.
The RBA forecasts, which were updated in late November, suggest a soft landing is still possible. If we look at Household Disposable Income and GDP, the RBA is forecasting a cross over point towards the end of 2024.
Well, goodo RBA and thanks for the forecast, but the fact is the September quarter’s actual Household Disposable Income was sharply lower than the forecast. It will be critical that the downward trend in the HDI starts to align with the forecasts if the soft-landing is to be achieved.
