The latest GDP figures show that the Reserve Bank has slowed things down so drastically that Australia’s economy, for the first time for 40 years, has gone an entire year where it grew only because of population increases.
There really is no good news to find in the December GDP figures. There’s a fair bit of “worst since” about the numbers.
Take the overall calendar year. In 2023 Australia produced just 2.0% more than it did in 2022. That is the worst since the lockdown year of 2020 and just the fourth time since the 1990s recession that we did not produce over 2% more than we did the previous year:
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On a per capita basis things were truly bad. 2023 was only the third time in the past 40 years that our economy was smaller when accounting for population growth than it had been the year before.
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This is not indicative of things going well. It’s indicative of an economy that has been slowed to a halt by the Reserve Bank.
We generally don’t look at total year growth, we focus more on quarterly growth. When we take into account population, Australia’s economy shrunk 0.3% in the December quarter. This was off the back of a 0.5% fall in the September quarter and a 0.2% fall in the June quarter. In the March quarter of last year it didn’t fall. But it didn’t grow either – growth was 0.0%.
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But don’t worry, we won’t hear talk of an “official recession” because total GDP in the December quarter went up 0.2%.
Cripes. 0.2% is not far off an error term.
The economy in the December quarter last year was just 1.5% bigger than it was in the final three months of 2022. That is half the average 3% growth Australia has had since the end of the 1990s recession.
The only reason anyone really cares about GDP is because there is a link between growth and unemployment. Historically we need GDP growth of about 2.5% to keep unemployment stable. If GDP grows slower than that, unemployment rises; if we get GDP growth above 2.5%, unemployment falls. So with 1.5% growth, it’s not a shock that unemployment went from 3.5% in December 2022 to 3.9% in December 2023.
And remember, this is what the RBA wanted. It predicted this growth in its February Statement on Monetary Policy and, worse, it predicts growth of just 1.3% in the year to June. If it gets its way, expect unemployment to keep rising.
So what kept the economy growing at all in the December quarter besides population? Trade mostly – or really our lack of it. Net exports contributed 0.6 percentage points of the 0.2% growth in December. So that means, if you took away our trade, our economy shrank 0.4%.
You might think that is because our exports grew. Nope. “Net exports” is exports minus imports. Our exports actually went down in the December quarter, but so too did our imports. We imported 3.4% less stuff in the December quarter than we did in July, August and September. And a big factor was the drop in imported consumer goods – down 5.4%.
Australians stopped shopping.
And businesses knew this would happen.
Three months ago, when looking at the September-quarter figures, I noted that “change in inventories” was the biggest contributor to growth and that was not a good thing “because next quarter we will likely see those inventories run down as businesses decide there is not much point buying more stock given households are not spending”.
And, alas, that came true.
In the December quarter businesses ran down the stocks of things they had to sell – because why bother building up stocks when you know people aren’t buying? This reduced GDP by 0.3%pts in the December quarter:
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If you take away trade and government spending, Australia’s domestic private sector fell 0.5% in the December quarter. That is not healthy.
And we all know it.
Household consumption grew a measly 0.1% in the December quarter. And what we bought was mostly essential items – food and groceries and paying off bills.
Our spending on discretionary items (those things we can do without) fell 0.9%.
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That’s a direct result of interest rate rises. And it has meant even though average household disposable income finally rose again, we did not feel like we were doing OK.
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Partly this is because the increase came after a long fall, and we’re only back where we were in 2015 (although it is worth remembering that from 2015 to 2019 household living standards barely rose).
But it is also due to what drove the increase in living standards.
Partly it was an increase in wages but also an increase in the value of housing and the incomes investors received from their properties. That is not exactly a wide scope of the nation.
There was also an increase in social assistance and a reduction in the level of tax being paid, although this is not as great as it sounds. The Bureau of Statistics noted this was due to “changed timing of final tax return submissions compared to previous years”.
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And so we find ourselves bidding goodbye to the 2023 economy, and the knowledge that we ended the year with a weak economy teetering on the brink of recession, with essentially only population growth keeping things going.
We should remember that the Reserve Bank decided in November to increase interest rates one more time, just when this economy was struggling, just as households were cutting back on buying discretionary items and just as unemployment was rising.
The Reserve Bank assured us it was aware of the risks of slowing the economy too harshly. Right now it should be very worried indeed.
