The RBAs current interest rate settings aimed at constricting demand, and in turn economic activity, is working to the extent that growth in the March quarter was an indiscernible 0.1%. Remove population growth and the picture would be yet more bleak because on a per capita basis, the past five quarters have all been negative. This is the first time this has occurred since per capita growth was first recorded in 1973.
However, as discussed elsewhere in this edition of Stats Count, annualised underlying inflation (the ‘trimmed mean’) reported for the year-ended May was 4.4%. That is well above the RBA target band of 2-3% per annum. This suggests that although the economy is weak there is still excess demand in respect to supply. The generally held view is this is particularly prevalent in the labour-intensive services sector.
One of the factors feeding into ‘sticky’ services inflation is the ongoing strength of employment which is also discussed elsewhere in this edition. In May, the nation created 39,700 (mostly full time) new jobs, which saw the seasonally adjusted unemployment rate drop to 4.0%. A robust market for labour sees more money in the economy than would normally be the case at this point in the macro-economic cycle.
The difficulty and the problem is clear enough. Low growth, sticky inflation and low unemployment is a complex recipe to unwind. Get inflation down and people lose their jobs and the opportunities for continued growth fade away. Do nothing to bring inflation into check and that alone will eat into growth, investment and ultimately employment, but usually in a longer term and more insidious manner. As it is, Australia is just a low migration quarter away from falling into genuine recession.
Moving from the headline numbers, the detailed picture is always more nuanced. In terms of the major contributors to growth in the quarter, household consumption rose 0.2%, which combined with the increase in inventories kept the show on the road. According to the ABS, the increase in the value of inventories was $2.2 billion, due to strength of imports of intermediate and consumption goods, while mining inventories increased, as production outpaced exports.
These gains were offset by a decline in business investment (down 0.2%) and, significantly for our industry, dwelling construction was down 0.1%.
Examining the specific composition of the decline in investment during the quarter, it is clear it was not confined to one sector, with investment down more-or-less across the board.
Total investment was down 0.9% compared to December, consisting of a decline of 0.9% in public investment and 0.8% in private investment. The ABS reported:
“Non-dwelling construction led the fall as work on mining projects fell after a high in the December quarter. Dwelling construction (-0.5%) and ownership transfer costs (-2.2%) both declined reflecting continued slowdown in building approvals and subdued activity in the property market. Machinery and equipment (+2.2%) partly offset the falls with increased investment on equipment for recently completed data centres and increased purchases of motor vehicles. Public investment (-0.9%) fell driven by state and local government education projects nearing completion and work slowing on health projects.”
Reflecting the tight economic conditions, household consumption on essentials rose 0.5% while discretionary spending rose a smaller 0.3%. Interestingly, according to the ABS, the increase in discretionary spending was driven by services.
In particular, transport services led the rise as new international airline routes to Asia saw increased air travel to overseas destinations. Also suggesting there was a “Taylor Swift” effect, the ABS reported:
“Record attendance at large scale sporting and music events saw increased spend on hotels, cafes and restaurants, and clothing and footwear”.
The obvious discretionary nature of that expenditure is relevant, but as many households know, Swifties are not to be denied and most had been planning their investment for a year or more, potentially delaying their various gratifications until Tay Tay came to town.
Less social but more important, real Household Disposable Income (Real HDI) – a key measure of living standards at a macro level, because it measures whether income net of inflation is moving up or down – was about the same as back in 2014.
The March quarter data shows that as the COVID stimulus finally washed through, the decline in Real HDI means households are about as liquid as they were a decade ago.
And where did the money to support the modest level of spending come from?
The reality is that as the rise in nominal household consumption outpaced growth in gross disposable income, household savings continued to be drawn down, exactly as the RBA models would have predicted. Well done interest rates, you can hear them saying.
In the March quarter, the household savings ratio decreased from 1.6% to 0.9%. There is little to no fat left in the event of any further shocks to the economy. One of those shocks will undoubtedly be a further interest rate rise. As Greg Jericho observed in The Guardian:
“It is worth remembering that in the past two years the share of household income spent on mortgage repayments has risen by the amount it did in five years during the mining boom, and by more than occurred in the run-up to the 1990s recession…”
And Jericho went on to add:
“…while we’re not quite spending as great of a share of our income on repayments as we were in 2008, the cost of an average dwelling is now equivalent to 16.6 years’ worth of the average household disposable income, compared to 12.3 years then and 9.5 years in 1989 when the cost of servicing a loan peaked before the recession.”
The risk of a thumping recession must now be high on the policy-maker and central bank agenda. Yet another reason the Government has thrust its efforts into building more dwellings, to alleviate the social and financial pressures facing households.
Consensus forecasts suggest the trend in growth is upward. The bi-annual Panel of Economists convened by The Conversation, expects growth to climb from the present very low 1.1% to 1.3% by the end of the year and to 2.0% by the end of 2025.
Concurrent with that growth outlook, the panel also expect the trend in prices to be downward with inflation to be back within the Reserve Bank’s 2-3% target band by June next year, and to be close to it (3.3%) by the end of this year.
As discussed in previous editions of Stats Count, policy makers face a delicate balancing act with interest rates slowing the economy but remaining unclear if that is sufficient to move inflation down fast enough to avoid or at least water down ‘inflationary expectations’ that have a habit of becoming anchored into the economy. More will be known with the June quarter CPI to be published in July, which one would expect will be critical to RBA thinking about any further rate rises.
