Drilling down into the numbers provides a review of the somewhat unsettled health of the Australian economy.
As the year draws to a close and an election looms, it’s a useful time to take stock of the state of the Australian economy. This “macro snapshot” shows an economy characterised by restrictive monetary policy, slowing but still above-target inflation, weak activity and lacklustre productivity growth. It also depicts a resilient labour market and a government with a federal debt/deficit position that is the envy of many of our peers.
Start with the Reserve Bank of Australia (RBA) and a monetary policy paradox. On the one hand, shifting assessments of both the appropriateness of the central bank’s policy settings and the future trajectory of the cash rate have dominated the macro debate this year. As of the RBA’s February 2024 Statement on Monetary Policy (SMP), for example, market pricing assumed the cash rate target would stay unchanged at 4.35 per cent until midyear, before falling to around 3.9 per cent by year’s end, then to around 3.4 per cent by the end of 2025. Fast-forward to the August 2024 SMP and a 25bp cut by early 2025 was fully priced in to be followed by an end-year rate of about 3.6 per cent.
On the other hand, through all the market expectation shifts and monetary policy stance arguments, the RBA has left the cash rate target unchanged. After delivering one 25bp hike at her second board meeting as governor last November, Michele Bullock left rates untouched for the next seven consecutive meetings.
Not that it’s been a quiet year for Martin Place. This February saw the first board meeting under the post-review regime, which expanded the policy deliberations to a two-day duration, introduced regular post-meeting press conferences and cut the number of board meetings to eight per year. The political temperature over restrictive RBA policy settings has since risen, with the Treasurer accusing the central bank of “smashing the economy” with rate rises. Politics also means that another key review recommendation, the introduction of a separate Monetary Policy Board, has been stalled.
Inflationary doldrums
Meanwhile, disinflation has continued, albeit more slowly than the RBA would like. After peaking at 7.8 per cent in Q4 2022, the headline rate of inflation as measured by the annual rate of change in the quarterly consumer price index (CPI) had fallen to 3.6 per cent by the March quarter of this year. It then ticked back up to 3.8 per cent in the following quarter. Disinflation has since resumed, with the more timely, but less reliable, monthly CPI indicator showing its annual rate of increase easing from 3.4 per cent in January this year to 2.7 per cent as of August, marking the first time the headline rate has returned to the RBA’s target range since October 2021.
With much of that drop reflecting the temporary impact of government subsidies to household electricity bills, the RBA has cautioned it will instead focus on the underlying rate of inflation. Here, the news is not as good, albeit still positive. The annual trimmed mean inflation rate had fallen to an above-target 3.4 per cent by August, down from 3.8 per cent in January.
Progress on the inflation front has come at the cost of weaker economic activity. Australia is mired in its longest “per capita” recession on record with real GDP per head contracting for six consecutive quarters up to Q2 2024. Granted, overall growth has remained positive since Q3 2021. But that has been entirely reliant on population growth powered by net overseas migration, along with a supporting role for public sector spending. In contrast, private demand has been soft, with the cost-of-living squeeze and recession-like confidence levels hitting household consumption. The implications were visible in this year’s June quarter, which saw the weakest consumption result since 2021’s COVID-19 lockdown. Lower inflation, budgetary cost-of-living support and tax relief may well spur a recovery in spending. Although, at time of writing, early indications were that households were choosing to save, not spend, the consequent lift to disposable incomes.
Productivity slumps
Productivity growth has also disappointed, with labour productivity having fallen for seven of the past 12 quarters. In level terms, GDP per hour worked is now back to where it was in the September quarter 2016, more than reversing an initial pandemic-spurred lift in productivity.
More positively, while the RBA’s gradualist approach to disinflation has nevertheless imposed a substantial cost in terms of weak activity, the labour market toll is proving more modest. At just 4.2 per cent in August 2024, the unemployment rate was almost unchanged from January. Moreover, the underemployment rate (6.5 per cent) was actually below the January reading (6.7 per cent). To date, the RBA’s policy of seeking to preserve as much of the pandemic-era labour market gains as possible, while returning inflation to target, has proven reasonably successful.
Finally, at a time when many advanced economies are struggling with swollen deficits and burdensome debts, Canberra has managed to deliver a second consecutive budget surplus and the first back-to-back surpluses since 2007–08. The underlying cash balance surplus in 2023–24 was $15.8b (0.6 per cent of GDP), down from 2022–23’s 0.9 per cent, but better than the budget forecast surplus of 0.3 per cent. Net debt was also smaller than projected, standing at a relatively low $491.5b (18.4 per cent of GDP) compared to projections of $499.9b (18.6 per cent).
AICD chief economist Mark Thirlwell GAICD has had more than 30 years focusing on the international political economy at the Bank of England, JPMorgan, Austrade, Export Finance Australia and the Lowy Institute.
This article first appeared under the headline 'Fair To Middling’ in the November 2024 issue of Company Director magazine.
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