During the global financial crisis, the line for how to stimulate and save the economy was “go hard; go households”. The Reserve Bank has adopted the same mantra but in reverse – going hard to ensure households get hurt in order to slow the economy. And the latest gross domestic product figures out on Wednesday show just how well they have succeeded in hurting households and slowing the economy.
The March quarter GDP figures confirm what everyone, except perhaps the RBA, knows – that Australia’s economy is slowing at a precarious rate. Given these figures do not include the impact of the rate rises of last month or earlier this week, and only part of the impact of the rate rises in February and March, there is no reason to think the economy is about to speed up.
You should probably get used to hearing the phrase “per-capita recession” because there was only one thing that kept Australia’s economy growing in the first three months of this year – population growth.
While overall GDP grew 0.2% (the worst quarterly result outside the pandemic period since September 2016), GDP per capita, which takes into account population growth, fell 0.2%.
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As I noted last month, both the Treasury and the Reserve Bank are predicting GDP per capita will go backwards in 2023-24. If we avoid a full recession, it will be mostly due to exports keeping “the economy” growing. But that will be little comfort for households.
The RBA has been raising rates to stop households from spending, in the belief that their spending is sending prices in the shops ever higher.
On Tuesday, when the Reserve Bank decided to make the total rate rises since April an even 400 basis points, it noted that “a significant source of uncertainty continues to be the outlook for household consumption”.
Well, if only they had waited less than 24 hours to discover that household consumption is slowing drastically.
There’s not much point showing the graphs of annual and quarterly household consumption because the pandemic wrecked the scale, but in March, consumption grew just 0.2%.
Excluding the pandemic, growth has only been this low eight times in the past 25 years – three times during the GFC, once in 2005 and 2012 and the rest in 2018-19 when things were so bad we were wondering if Australia was heading into a recession.
The past six months of household spending has been at levels only seen before in a recession or the GFC, and no one believes it is about to improve.
So, not good.
Most of the growth (excluding population) in March came from private investment in machinery and equipment. But take away public sector investment and spending, and the economy would have not grown at all:
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The private sector has not been producing anything like enough to keep the economy running along nicely. It is worth noting that high interest rates not only stop people buying houses and taking out personal loans – they are also good at stopping businesses loans as well.
That’s not wonderful news, given last year private sector investment has basically contributed nothing to GDP growth:
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But don’t worry, companies are still making profits.
Corporate “gross operating surplus” (the national accounts version of profits) rose 3.2% in the March quarter, ahead of the 2.4% rise in the compensation of employees. ‘
Over the past year, corporate profits rose 12.7% while employee compensation rose 10.8%. Because employees’ wages and salaries make up half of the economy and profits make up 32%, this means wages are now contributing as much as profits to GDP growth:
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On Tuesday night the governor of the Reserve Bank, Philip Lowe, produced a graph comparing unit labour costs with the CPI in order to demonstrate just how crucial wages are to inflation growth.
Oddly he forgot to include the other main aspect of income in the economy – corporate profits. So I have done him a favour and reproduced the graph with them included.
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Since the pandemic, unit profits costs have risen 37% while unit labour costs have risen 12%.
There will be a lot of commentary about rising labour costs meaning the RBA is going to have to increase rates again. But can we just note that real unit labour costs – the labour cost of one unit of GDP – are now 6% lower than they were before the pandemic?
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The belief that labour costs must always fall in real terms is why households are doing it so tough, and why real compensation per hour barely grew in the decade before the pandemic and has plunged since then:
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Households are the economy. During the pandemic, household disposable incomes were propped up by jobkeeper and the doubling of jobseeker, but they are now falling at a seriously fast rate.
All of the boost from the pandemic stimulus is gone and we know that when household incomes fall, the economy overall is in a very bad shape:
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The impact of further interest rates will see household spending becoming ever weaker.
The next GDP figures will contain the full impact of the rate rises in February and March, and some of the impact of the rises last month and on Tuesday.
The September quarter figures will contain the full impact of the May and June rises and some of the impact of any rises to come.
The economy is slowing, and the worry is the Reserve Bank seems desperate to ensure this is as good as it gets for a long time.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
