Economics update | 9 June 2023

09 Jun 2023

Australian economy on a slowdown

Earlier this week, the Reserve Bank announced a 25-basis point increase in the cash rate target, lifting it to 4.10 per cent. The Reserve Bank governor cited the recent data on inflation, wages growth and the turn-around in housing prices as factors driving the decision. Dr Lowe has also been expressing concerns about high unit labour costs and that expectations of increasing wages risk underpinning high inflation outcomes.

The Reserve Bank decision was followed by the release of national accounts, which indicated the earlier rate increases were clearly having an impact, with economic activity slowing in the March quarter 2023. GDP growth decelerating to only 0.2 per cent for the March quarter and 2.3 per cent for the year to March. This is the weakest result since the Covid-19 Delta lockdown contraction in September 2021.

GDP per capita contracted by 0.2 per cent, following a very modest gain of 0.1 per cent in the December quarter 2022. This indicates that the economy is only being sustained by population growth. The faltering growth in the economic activity is being driven by weakening household consumption, which grew by 0.2 per cent in the March quarter, compared to 2.2 per cent in the June quarter 2022. Consumer sentiment is in the doldrum with growth in essential spending increasing by 1.1 per cent, but discretionary spending falling by 1 per cent.

Household savings built up during the COVID-19 period are drying up, falling from 11.3 per cent in March 2022 to 3.7 per cent in March 2023, due to increasing cost of living pressure and rising interest rates. However, business investment continues to grow strong in the March quarter 2023 with investment in machinery and equipment rising by 6 per cent for the quarter and 7.2 per cent for the year.

Of great concern is the deterioration of labour productivity, which declined 0.3 per cent in the March quarter and is down by a massive 4.6 per cent over the year. At the same time, the compensation of employees increased to 2.4 per cent for the quarter and 10.8 per cent for the year. This growth in the employee compensation is unsustainable in an environment of falling productivity, contributing to inflationary pressure and the Reserve Bank to increase the cash rate.

The OECD Economic Outlook was also released this week. This accentuates the slowing of advanced economies, with global growth projected to slow 2.7 per cent in 2023, followed by a modest improvement of 2.9 per cent in 2024. Despite waning international markets, the OECD emphasised that monetary policy must remain restrictive, as inflation remains stubbornly high.

Economics update | 9 June 2023

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Economics update | 9 June 2023

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