The politicians have weighed in on the Reserve Bank of Australia’s economic policy and its reticence to reduce interest rates in the face of community pressure. We look at what the numbers really show.
Treasurer Jim Chalmers has stated that global uncertainty and rate rises are “smashing the economy”.
In early September, former Treasurer Wayne Swan said that the RBA was “putting economic dogma over rational economic decision making, hammering households, hammering Mums and Dads with higher interest rates, causing a collapse in spending and driving the economy backwards” and that the RBA was, “simply punching itself in the face.”
Australian mortgage holders and renters have yet to receive relief from interest rates following 13 successive rises to the official cash rate since May 2022.
The Reserve Bank’s position and the flow-through effects
The Reserve Bank of Australia (RBA) Board opted to maintain the official cash rates at 4.35% at its September Board meeting. The rationale is that inflation remains persistently high and has been for the last 11 quarters. The consumer price index (CPI) rose 3.9% over the year to the June quarter and remains above the RBA’s target range of 2-3%.
But, it is not persistently high inflation that is causing the politicians to weigh in. RBA Governor Michele Bullock has warned that “it is premature to be thinking about rate cuts” and that “the Board does not expect that it will be in a position to cut rates in the near term.”
The Australian Bureau of Statistics (ABS) June Quarter National Accounts paint a bleak picture of the Australian economy. Per capita GDP fell for the sixth consecutive quarter by -0.4% to -1.5%, the longest consecutive period of extended weakness ever recorded.
Household spending weakest since COVID-19 Delta
Household spending fell by -0.2% in the quarter, the weakest growth rate since the Delta-variant lockdown affected September quarter 2021.
Discretionary spending – travel and hospitality impacted most
The ABS says we spent less on discretionary items (-1.1%), particularly for events and travel. Unsurprisingly, spending on hotels, cafes, and restaurants was down 1.5%. Spending on food also fell -0.1% as households looked to reduce grocery bills.
Household savings lowest since 2006
The savings ratio remains low. Households saved only 0.9% of their income over the year. This was the lowest rate of annual saving since 2006-07. Net savings reduce when household income grows slower than household spending.
The unemployment rate
According to seasonally adjusted data released by the Australian Bureau of Statistics (ABS), the unemployment rate held steady at 4.1 per cent in September, in line with the revised figure for August but below analysts’ estimates. The economy added 64,100 jobs last month, significantly more than the 25,000 economists expected.
While this is good news, it would likely push the time out for Australia’s first rate cut since COVID.
The RBA has two more board meetings this year – Melbourne Cup day and December – before its first meeting in February next year.
Economic growth from Government spending
The Australian economy did grow by 0.2%, the eleventh consecutive quarter of growth, but the growth rate was unimpressive. The ABS says that “the weak growth reflects subdued household demand, which detracted 0.1 percentage points from GDP growth while government consumption contributed 0.3 percentage points, the same contribution to growth as the previous quarter.”
Government spending increased by 1.4% over the quarter. Commonwealth social assistance benefits to households led the rise, with continued strength in expenditure on national programs providing health services. State and local government expenditures also rose with increased employee expenses across most states and territories.
The RBA’s position on interest rates
The RBA is on a narrow path. It’s trying to bring inflation back to target within a reasonable timeframe while preserving the gains in the labour market over the last few years. The RBA expects to reach this target range by the end of 2025.
Through 2022 and 2023, most components of the CPI basket were growing faster than usual (the CPI is literally a basket of 87 types of expenditure across 11 groups, such as household spending, education, and transport). Over the last 18 months, the price of goods has come down as supply disruptions like COVID-19 and the war in Ukraine have eased, and it is now growing close to the historical average.
The fundamental problem areas are housing costs and services. In housing, the growth is from increased construction costs and substantial rent increases. For services, while discretionary spending is down, as we can see from the June National Accounts, inflation in this category remains high at 5.3% for the June quarter. Wage increases and lower productivity, combined with the increased costs of doing business (electricity, insurance, logistics, rent, etc.), are all impacting.
The RBA is eager to underscore the human toll of inflation. It’s the most vulnerable in our community who bear the brunt. Lower income households, who tend to allocate more of their spending towards essentials like food, utility bills, and rent, are hit hardest. In contrast, higher income households, who spend more on owner-occupied housing and discretionary items, are less affected.
Cost-of-living pressures have hit younger and lower income households particularly hard. These groups, already facing financial challenges, are feeling the squeeze of inflation more than most.
