Cost-of-living pressures continue to squeeze the household budget but perhaps we are finally starting to see a slowing of economic growth.
Seven months after the first interest rate hike from the RBA - designed explicitly to cool the economy and, with that, the rate of inflation - there are unambiguous signs the slowdown is underway.
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Please note, before we delve into the hard data, an economic slowdown DOES NOT equal an inevitable path to recession, as some commentators would have you believe. All it means is that, as consumers hunker down with their mortgage repayments increasing and businesses pare back some hiring and investment plans, the rate of growth eases. Like from 5 per cent back to 2 per cent. Still growing, but just not as quickly.
Importantly, retail sales are taking something of a hit. In the September quarter, real retail spending rose by just 0.2 per cent - a weak result. This was followed with the monthly data for October showing a fall of 0.2 per cent. It looks certain that household spending growth will remain soft through to the middle of 2023 on the back of higher interest rates and a loss in wealth, as house prices and many other asset prices fall.
This is good news.
The number of building approvals is also well below the 2021 peak as the housing construction cycle turns lower. With falling house prices and the costs of construction rising strongly, developers and others are scaling back their construction plans. This slowdown will ease cost pressures, inflation in other words, as demand for materials and labour in the construction sector drops back.
Private sector business investment - which was expected to be the foundation for growth in the economy as consumer demand paused - unexpectedly fell 0.6 per cent in the September quarter. While the outlook for investment over the next year remains positive, this was a disappointing result that will dampen the GDP result, which is scheduled to be released next week.
Importantly for Australia, the global economy is weakening under the weight of tighter policy in most major countries. Indeed, calls for a recession in 2023 - or at least something close to it - are getting louder and louder. While it remains unclear whether or not there will in fact be a recession next year, there is no doubt the global economy will be very weak into the first half of 2023, with a risk this sluggishness could extend into the second half.
This is an issue Reserve Bank (RBA) governor Philip Lowe has highlighted more recently as a vital factor why the Bank has hiked only 25 basis points in October and November while other central banks have continued to hike 75 or 50 basis points.
A global hard landing would ensure lower inflation over the course of the next year. Already, there are many indicators pointing to lower inflation – weaker growth being one of them. Importantly, supply chain problems have been resolved with the deflationary issues starting to impact prices at the wholesale level. So too with commodity prices, which are well below the peak levels of mid-2022.
While it is still early days, the slowdown that Australia had to have is occurring. With the usual lag, inflation will fall. This is great news and it signals that the end of the interest rate hiking cycle is near.
By the second half of 2023, annual GDP growth is likely to be tracking at 2 per cent, the unemployment rate will have edged up to a still-very-respectable 4 per cent and inflation will be free-falling to an annualised pace near the RBA’s 2-3 per cent target.
This would be a dream scenario that would be at risk if the RBA over hiked interest rates - something the beleaguered RBA governor would want to avoid.