The Reserve Bank of Australia has got what it wanted – after increasing the cash rate by 400 basis points in order to slow the economy, we now have an economy that is growing only due to population growth and even then only due to government spending.
Three months ago I suggested “you should probably get used to hearing the phrase ‘per-capita recession’”, and well, here we are.
In the June quarter, after accounting for population growth, Australia’s economy dropped for the second consecutive quarter by 0.3%. Coincidentally, Australia’s economy on a per capita basis is now 0.3% smaller than it was a year ago:
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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.
So, you know, not good.
The past quarter saw quite a jump in our population due to the continual recovery from the pandemic and especially due to more foreign students.
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Given the population grew by 0.7% our total economy should have grown much faster. That it only grew 0.4% reinforces just how weak things are.
Much of the growth was due to increased exports. But a lot of those exports came from drawing down inventories. When inventories fall (as happened in the June quarter) companies are selling things that are sitting in a silo or warehouse. This was the case with mining supplies and grain exports.
So in effect that drawdown in inventories cancelled out a lot of the increase in exports.
The same occurred with some household spending. There was a big jump in motor vehicles sales, but that also involved a rundown in inventories due, as the Australian Bureau of Statistics noted, to “the clearing of quarantine backlogs for motor vehicles”.
Take away the 6% increase in sales of motor vehicles and household consumption fell in the June quarter.
As it is the increase in household spending was driven by another drop in the savings rate – down to the 2008 levels:
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Here we see the real impact of the RBA’s decision to increase interest rates. Households are reducing their savings levels in order to pay for essentials bills, not to go on holiday or have fun:
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That really leaves us with public spending lifting the economy. In the June quarter public consumption and investment added 0.3 percentage points to GDP growth. Take that away and the economy didn’t grow at all:
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That’s not to say it is all bad news.
The past year has seen a nice increase in business investment – both in non-dwelling construction and in machinery and equipment – and also some good growth in public sector infrastructure spending. This hopefully will bolster employment even as people are spending less in the shops:
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Aside from the drop in GDP per capita, the big news of the national accounts is that the terms of trade (essentially the ratio of the prices of our exports and our imports) fell 7.8% – the biggest one-quarter fall since the GFC and the fourth biggest on record.
This was due to a big fall in the coal and gas prices due to (don’t laugh) climate change, which has seen above-average temperatures in the northern hemisphere, as well as a weaker Chinese economy that saw less demand for our iron ore.
With this came a fall in corporate profits, and as a result the increase in wages and salaries drove growth in the income side of the economy:
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The total amount of compensation of employees rose 1.6% in the June quarter, well above inflation growth (which actually fell across the total economy due to those falling export prices).
As a result, real labour costs rose 3.2% in the June quarter. As sizeable jump to be sure, but it is worth noting that the cost of labour in real terms remains about 1.2% below what it was prior to the pandemic.
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So, if wages are rising now does this means households are better off?
The increase in wages combined with an increase in hours worked means that the amount workers are getting per hour has risen. It’s no longer as low as it has been in real terms since 2012; now it is just as bad as it has been since 2013:
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But real household disposable income per capita is down some 5.3% on where it was a year ago. Households overall are much worse off than they were a year ago and roughly back to where they were before the pandemic.
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It is thus not surprising that the economy is struggling. When you get down to it, the economy is really about households, and when they struggle, so too does everything else. And that is exactly what the Reserve Bank wanted to happen.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
