June quarter economic growth (measured by Gross Domestic Products [GDP]) remained in positive territory, recording a 0.4% increase, feeding into 2.1% growth for the year, on a seasonally adjusted basis.
The sustenance of economic growth ranks as a positive, but the deteriorating quarterly data is now clearly showing the consequences of the Reserve Bank of Australia’s monetary policy tightening, achieved by striking the economic ship with repeated blows from the blunt object known as interest rate rises.
With the economy growing just 0.4% in the June quarter, it is quickly evident the growth has been delivered largely by population growth, which is running faster at 0.65%. So, if the population was not bounding along, Australia would probably have faced a quarter of negative economic growth.
Population growth since the opening of the economy post COVID has been strong, with various visa holders able to enter Australia and the return of international students a significant factor.
While population growth generates economic activity, more broadly it demonstrates that on a per capita basis, our economic growth is retreating. As Greg Jericho wrote in The Guardian in early September:
“Three months ago I suggested “you should probably get used to hearing the phrase ‘per-capita recession’”, and well, here we are.”
The point Jericho makes is that this situation was predictable months ago and needs to be factored into monetary policy (controlled by the RBA) sooner.
We can see how ‘delicately poised’ our economic growth is when we look at growth on a per capita basis. As the chart below shows, growth was -0.3% in the June quarter, following on from -0.3% in the March quarter.
To put this in perspective, excluding the pandemic lockdowns, the last time our GDP per capita was smaller than it was a year earlier was during the GFC, and the last time before that was the 1990s recession.
This is the fine line central bankers and policy makers are juggling, as they try to shake the barnacles of inflation from the national economic ship.
Hit the economic ship too hard and too often with interest rate rises and you run the risk of putting a hole in it, but if you don’t hit it hard enough, the barnacles stay on and it takes longer and is harder to find safe waters.
The main contributors to growth during the June quarter were exports +1.0%, which was partly offset by the run down in inventory which was -1.1%. The ABS advises the inventory run down reflected the export of grain inventories following recent harvests and the gradual clearing of COVID quarantine backlogs for motor vehicles and other equipment.
A consistent concern raised by now former RBA governor Phil Lowe was the potential for recent wage rises to feed into inflation, if not associated with increased productivity. A very macro measure of productivity is GDP per hour worked. This measure continued to decline in the June quarter, with the trend looking decidedly sickly.
Output per hour worked, a proxy for labour productivity, fell 2.0% in the June quarter and by 3.6% over the past year, pushing national productivity (the blue bars) down to March 2016 levels. As we discuss elsewhere in this edition of Statistics Count, there are productivity related consequences to full employment, including having a workforce that may not be perfectly matching skills to tasks.
Cost of living pressures continued for households with household consumption, a key driver of the economy, up just +0.1% in the June quarter. Discretionary spending all but evaporated and declined -0.5% as households concentrated on essential items, where spending grew +0.5%, much of which was related to higher prices for staples and utilities.
We can all understand the domestic factors and actions aimed at slowing the economy to get inflation back into the RBA’s target band of 2-3%. However, looking externally, the September OECD Economic Outlook points to some concerns for global growth arising from a slow down in China.
The OECD has modelled several scenarios including a 3% decline in Chinese domestic demand, which the report notes would be similar to declines in 2014 and 2017, with even larger falls experienced during the pandemic.
The results of the modelling show a shock to Chinese domestic demand of that scale would directly lower global economic growth by 0.6% and world trade volumes would decline by 1.25%. GDP in China would consequently drop by 2.0%. Significantly for exporting nations like Australia, weaker domestic demand in China would be offset in part by lower import volumes.
Source: OECD Economic Outlook September 2023
This is something to keep an eye on as any further external shocks would impact the gentle return to more stable economic waters for which the RBA is trying to facilitate passage.
