Without any real fanfare and certainly no great coverage, the Reserve Bank of Australia last week let us know that Australian households are about to be smashed.
Other than during exceptional times, such as a pandemic, the RBA or the government don’t usually forecast a recession, thus it is always a bit unsettling to see a central bank suggest bad times are coming. And that is what the Reserve Bank did last Friday in its latest statement on monetary policy.
The RBA’s forecasts are in some ways more optimistic than the Treasury was in last month’s budget, and (because this is economics) in other ways more pessimistic.
For example, it forecasts lower unemployment by June next year than the budget did, but higher inflation growth.
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Both organisations, however, are pessimistic about actual economic growth. Both have GDP growing below 2% for likely more than a year. While that’s not a definitive sign of a recession, it is something in the past that has only occurred during recessions.
Where a recession is predicted, according to the RBA, is in the measure that I have for a number of years now been using as a guide of economic health – real household disposable income.
You can’t eat GDP, and while it might look nice on a spreadsheet that iron ore, gas and coal exports are helping lift “the economy”, given gas prices don’t really help unless you own a mine, I prefer focusing on households.
Usually, I calculate it on a per capita basis, but the Reserve Bank doesn’t forecast that.
What it does forecast, however, is a big fall in the amount of income households are going to have at their disposal to either spend or (if they are lucky) save.
Part of the drop is because household incomes actually surged during the pandemic. This was because the Morrison government realised that stimulus works to keep the economy going and it also did not want to subject possible LNP voters to poverty so it nearly doubled jobseeker (temporarily).
The impact of “social assistance benefits” in 2020 is very clear:
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As that abnormal boost of social assistance washed out you would expect incomes to fall, so it is not a shock that the RBA forecasts a 2.6% fall in real household disposable income by the end of this year.
The problem is it forecasts a 2.6% fall in the 12 months to June next year, a 1.3% fall through 2023, and then a mere 0.3% growth in 12 months to the middle of 2024.
To give you some context, in the decade before the pandemic, the average annual growth was 2.5%.
More worrying, however, is that this is not just an unwinding of the stimulus and getting us back on the path we were on before the pandemic.
Nope. We are going backwards in a manner that has not occurred before.
The problem isn’t that household incomes are going to fall in real terms below the artificial high of the pandemic stimulus. No, the problem is that incomes are set to fall below the level they would have been expected to be prior to the pandemic.
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By the end of 2024, the Reserve Bank’s estimates would see real household incomes some 3.6% below where they would have expected to be given the pre-pandemic trend.
This an astonishing fall.
Throughout the past 60 years household incomes in real terms have risen as a matter of course.
During the late 1970s recession they fell 1.7% below the recent peak. The 1982-83 recession saw a 1.2% fall, while in the 1990s recession households experienced a 1.9% drop from pre-recession peak level.
Rather coincidentally in the six years prior to September 1990, when that recession took hold, and the six years prior to June this year, real household incomes grew by the same amount – around 17.5%.
The paths were a bit different, but both had income booms before the bust. In the 1980s we had an asset-price boom; currently we have had the pandemic stimulus plus a surge in employment.
But the current forecast fall in real household incomes is actually worse than what occurred during the 1990s recession:
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In the 1990s it took nine quarters to get back above the pre-recession peak; whereas currently we are looking at still being below the level we are now in two-and-a-half years’ time.
It all highlights that we are in a very tough spot.
We know the economy is about to slow and the Reserve Bank is predicting household incomes to drastically fall. And yet we have a mass of very smart people nodding and suggesting this needs to occur because we need to get inflation under control and, well, damn the consequences.
The Reserve Bank talks a great deal about trying to thread the needle of raising interest rates just enough to slow inflation to below 3% while also not shuttering the economy.
But it all depends on what you think matters in the economy. GDP growth will certainly slow but will keep growing as exports and mining companies continue to do well.
The RBA, however, has let everyone know households are in for a massive, historic hit.
That this goes without any major comment or discussion has me wondering if we need to think more about what the economic and political class in this country considers is vital – and whether that is right.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
This story originally referred to average household disposable income. It has been edited to real household disposable income.
