Australia’s economy is slowing rapidly as families slash spending and raid savings to overcome the cost-of-living crisis, according to new growth data that could leave the RBA “nervous”.
Official figures published on Wednesday revealed the nation suffered a torrid start to 2023, with gross domestic product (GDP) rising just 0.2 – the slowest since the depths of 2021’s lockdowns.
It is caused by households cutting back on non-essentials like furniture, household electronics and cars as they face rising interest rates and high inflation.
And it could get worse from here, economists warn, with more interest rate hikes on the horizon after productivity growth – a closely watched metric at the RBA – fell short of central bank hopes.
It comes after RBA governor Philip Lowe warned on Wednesday morning that the central bank is walking a fine line between curbing inflation and sparking a downturn that costs many jobs.
The risk of such a contraction is rising with each rate hike, but Dr Lowe said more increases may be needed unless a jump in productivity prevents new-found wages growth from fuelling inflation.
But, unfortunately, there were no signs of a productivity rebound in Wednesday’s figures, BIS Oxford Economics Australia head of macroeconomic forecasting Sean Langcake said.
“The RBA will be pretty nervous about what the productivity growth numbers mean for services inflation,” he said.
“We’re more likely than not to get another rate hike.”
‘Brace yourself’
The growth slowdown over the March quarter was anticipated, but it still makes for grim reading.
Consumption growth slowed to 0.2 per cent on the back of a 1 per cent fall in discretionary spending, while the household savings ratio fell to 3.7 per cent – the lowest level since 2008.
Treasurer Jim Chalmers said it wasn’t surprising that families are feeling the financial pressure amid the fastest interest rate increases on record and the highest inflation rate in 30 years.
“Households have pulled back on discretionary spending to make room for essentials,” he said on Wednesday.
“Mortgage interest expenses also doubled over the year to the March quarter.”
Mr Langcake said the consumer retreat is a “brace yourself” moment for the slowing economy.
“We’re fortunate that we’re coming from a very strong starting point,” he said. “And if things do go sideways we do have ways to loosen policy levers.”
A consumer retreat is bad news for the whole economy because domestic consumption typically accounts for more than half of overall growth.
A national recession is still seen as unlikely, largely because of population growth, but many economists are predicting a per capita recession as family budgets weaken.
That suggests that even if the entire economy doesn’t goes backwards, it may still feel like a downturn for many households as financial stress soars and prices for essential bills keep going up.
KPMG chief economist Brendan Rynne said per capita GDP growth was negative in the March quarter, making the June-quarter figures pivotal.
“With the March-quarter result reflecting weakening conditions, KPMG’s view is that the economy will slow down further, though [it] will avoid recession,” Dr Rynne said.
“That risk, however, is increasing and the RBA’s hoped-for soft landing is looking increasingly illusory.”
More rate hikes?
The outlook for rates is looking worse after the RBA hiked again earlier this week.
Dr Lowe said on Wednesday that the June rate increase was passed to give central bankers more confidence that inflation is falling fast enough to prevent higher prices from becoming entrenched.
The RBA had been expected to finish raising rates in early 2023, but economists say its inflation-reduction strategy could be derailed by rising wages growth and low productivity.
In other words, while the RBA believes higher wages growth is consistent with inflation falling back to the target band, that’s only likely to happen if productivity returns to pre-COVID levels.
Wednesday’s figures weren’t encouraging on that front – production per hour worked fell 0.3 per cent on the quarter and is down 4.3 per cent annually, while unit labour costs rose 1 per cent.
ANZ Bank is now predicting at least one more interest rate hike in August, while other key forecasters are currently rethinking what the RBA will do after its surprise hike in June.
