And so the corner has been turned. No longer is population the only thing keeping the economy growing. But the still-weak GDP figures of the last three months of 2024 highlight that the Reserve Bank took too long to cut rates and more cuts are needed.
First things first: let’s bid adieu to the crappiness that was 2024. It was not a year that will bring many fond memories, especially on the economic front here in Australia.
We normally talk about annual GDP growth in terms of the growth in a quarter compared with the same quarter a year earlier. So when you see reports that in the past year Australia’s GDP grew 1.3%, that means the economy in the December quarter of 2024 was 1.3% bigger than it was in the December quarter of 2023.
But to get a true picture of 2024, we need to compare the total amount of production in all of 2024 with that in all of 2023. This reveals that Australia’s economy grew just 1.1% in 2024 – the sixth-worst year on record and, excluding the pandemic year of 2020, the worst since 1990:
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But at least in the more traditional way of looking at growth, things are improving.
Finally, we are no longer in a “per capita” recession as, for the first time since December 2022, GDP per capita grew. Sure it was only 0.1% but we’ll take what we can get.
And it wasn’t due to a slowing of population growth in the last three months of 2024 – rather the strength of the economy was finally enough that population wasn’t the only thing keeping the economy growing:
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Not that anyone should get too carried away with this growth.
The talk of course immediately turned to interest rates and the belief that the 0.6% growth in the December quarter, which was the fastest for three years, will mean the RBA won’t cut rates again in April.
It really is quite dispiriting how easily some of the commentaries and economists are now satisfied.
The economic growth in the December quarter might have been the fastest for three years but that’s a bit like saying Donald Trump’s address to Congress on Tuesday was his least unhinged speech for three years – the bar is very low and it does not deserve praise.
In the 25 years before the pandemic, average quarterly growth was 0.8% and average annual growth was 3.1%. When you have the economy only growing 1.3% that is hardly cause to suggest an economy in danger of overheating lest the RBA cut rates again.
Instead it should have everyone wondering why the RBA thought they didn’t need to cut rates in November or December last year. Nothing in these figures suggest the best course of action was to wait until February.
The reasons for the growth also demonstrate that while the economy is not as weak as it was, it’s still weak:
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Government spending and investment over the past year was overwhelmingly the main cause of the economy growing. Even in the December quarter the public sector remained a major cause of growth. Net exports – led by agriculture (chickpeas going to India being a main driver) – and tourists taking advantage of our low dollar helped out.
This is all well and good but if you take out trade and government spending the economy grew only 0.7% in the past year – well below the 2.6% long-term average:
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And while households began to spend more, again, we are talking off a very low base:
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Fortunately the last quarter of December saw some small improvements but this was not due to the RBA doing anything other than perhaps stopping hitting us all in the solar plexus.
The level of household income being spent on mortgage repayments has peaked at lower than occurred in 2008 – although given the cash rate is nearly three percentage point lower than then, it shows just how much bigger mortgages are not than in 2008:
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But mortgage repayments continue to be the major reason why households are struggling. On a per capita basis, increased mortgage repayments caused nearly half of the drop in living standards:
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There was a slight increase in living standards in the December quarter but things remain pretty bleak – especially for the Albanese government given this is the line the opposition will trumpet from now until the federal election:
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Certainly things are gloomy on this score, however I think we should consider the analysis of economist Zac Gross who notes that, unlike other countries such as the US, Australia over the past few years has had a large spike in migration. This makes the per capita picture looks worse, without truly reflecting the reality.
“Per capita” is just an average. If 10 people in a room each have an annual income of $100,000 and then three foreign students with an annual income each of $40,000 enter, then the average income of the room falls but no one is actually worse off – but that is essentially what has happened. Australia has had a big spike in migrants – many of whom are students. That doesn’t make us worse off but it makes the average lower.
Total household disposable income has actually risen since the pandemic but migration which has seen population grow faster than usual makes things look perhaps worse than they are:
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That is not to say the situation is fine and dandy. That growth in total disposable income is rather weak and real wages remain well below pandemic levels, and households clearly have seen a fall in living standards.
These national accounts provide little sense of an economy powering ahead at full steam.
Yes, the corner has been turned, but the Reserve Bank should be looking at these numbers and wondering why it waited until February to act, and it should also realise it needs to cut the rate again in April to keep the recovery going at a solid speed.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
