On seeing the latest GDP figures, the best that you can say is that you hope the Reserve Bank is happy. The economy is slowing as the impact of the interest rate rises has hit households so strongly that, taking into account population growth, Australia’s economy didn’t grow at all in real terms in the last three months of 2022.
What an achievement! Who would have guessed that raising the cash rate by 300 basis points from 0.1% in May to 3.1% in December would slow the economy so much?
Well, apart from anyone who has the slightest bit of memory of what has happened in previous times when interest rates rose so quickly.
And to be honest, even the RBA saw this coming. In its latest statement on monetary policy, the RBA predicted annual GDP growth to December 2022 would be 2.7%, and so it was.
Kudos!
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Before I delve into the weeds of these figures, let’s get one thing straight – an economy growing at just 0.5% in a quarter, as it did in the December quarter, is terrible. Add in that per capita growth was totally absent and you have an economy already stalling.
And it is likely that the impact of around 100 basis points worth of interest rates rises has yet to really show up in the figures, which means there is a danger of this 0.5% growth being a high point.
It’s worse though when you look at why the economy grew even the meagre amount it did:
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Lucky the imports delivered so much growth!
This is one of those real quirks of GDP.
In the December quarter, Australia imported 4.3% less stuff than we did in the September quarter. Because the money you pay for imports leaves Australia, imports actually lower GDP. And so when you import less (which is what happened in December) it is good for GDP growth.
We also exported 1.1% more things in the December quarter than in the September quarter, and this added 0.2 percentage points to our economy (because it is money coming into the economy).
All up, international trade accounted for 1.1 percentage points of the 0.5% of GDP growth.
If that sounds weird, it is because if you took away international trade, the economy actually shrank 0.6%.
And that is not good.
The confusing thing about fewer imports being good for GDP figures is economists don’t actually want imports to fall, but they want exports to grow by more.
As is pretty obvious, if imports are falling that means households and companies are buying less from overseas, and we only do that when things are bad.
Business investment fell in the December quarter as both housing and non-dwelling construction and investment in machinery and equipment fell.
And when businesses are not investing, we need households to spend to keep the domestic economy going.
Household consumption, which makes up a touch over half of the total economy, rose in the December quarter, but by just 0.3% – that’s around half the median level of the past 20 years.
And it is clear that the only thing sustaining even that level of spending is that we are reducing our level of savings – such that we are saving less than we have since 2008.
All that saving due to the pandemic when incomes increased due to stimulus and we could not go out and spend? All gone.
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This is not a shock when you consider that in the past year, real household disposable incomes per capita fell 5%.
Household incomes were boosted through pandemic stimulus, but that is all gone and we are back to where we would expect to have been given the trend prior to the pandemic – a pretty weak trend, it should be noted:
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In September, GDP growth was rising while household incomes were falling. The December figures suggest that we should not expect that disconnect to continue for long, and where household incomes go so too will GDP:
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To get household incomes moving we need wages to start rising. And yes they are, but nowhere near fast enough to keep up with inflation.
In December labour costs finally remained steady in real terms, but still are down 1.6% over 2022 and a massive 6.3% below where they were before the pandemic. On the other hand, the unit cost of profits is 14% above December 2019 levels:
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That is why my colleague at the Centre for Future Work, Dr Jim Stanford, has argued that profits rather than wages are driving inflation.
Certainly, these figures suggest that anyone concerned about a wage-price spiral will need to keep waiting for actual evidence of such an event. The amount of compensation per hour worked in real terms is on average back where it was in 2012 and fell 5.4% in the past year.
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All up, things are not great for workers and households. Profits though are doing well. They contributed nearly five times as much to economic growth in the past year than did wages and salaries:
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And so we arrive at the point where interest rate rises are hitting home. Households are winding back spending, the saving buffers from the pandemic are gone, and incomes and wages are not keeping up with inflation.
The annual GDP growth of 2.7% is on the surface not too bad – it’s roughly the average over the past 20 years. But the weak 0.5% growth anticipates much worse to come, especially given there remains the promise of even more interest rate rises and the domestic economy has already begun to fall.
• Greg Jericho is a Guardian columnist and policy director at the Australia Institute’s Centre for Future Work
