Australia markets closed

    +151.80 (+2.13%)
  • ASX 200

    +149.80 (+2.19%)

    -0.0035 (-0.50%)
  • OIL

    +0.68 (+0.79%)
  • GOLD

    -2.70 (-0.15%)

    +911.79 (+1.72%)
  • CMC Crypto 200

    +21.37 (+2.54%)

    -0.0035 (-0.56%)

    -0.0006 (-0.06%)
  • NZX 50

    -198.17 (-1.64%)

    +451.50 (+3.22%)
  • FTSE

    -88.24 (-1.17%)
  • Dow Jones

    +564.69 (+1.65%)
  • DAX

    -205.32 (-1.32%)
  • Hang Seng

    -256.92 (-1.08%)
  • NIKKEI 225

    +547.04 (+2.09%)

‘Rapid reverse’: Exactly how weak is the Australian economy?

·4-min read
Empty tables are seen at a cafe during lunch time in the suburbs of Crows Nest in Sydney, Australia, on Wednesday, March 4, 2020. Australia has been hard-hit by coronavirus. (Photographer: Brendon Thorne/Bloomberg)
Empty tables are seen at a cafe during lunch time in the suburbs of Crows Nest in Sydney, Australia, on Wednesday, March 4, 2020. Australia has been hard-hit by coronavirus. (Photographer: Brendon Thorne/Bloomberg)

Late in 2019, it appeared the economy had finally got some traction and there were signs of a long awaited pick-up in activity.

With exports doing well, rising house prices boosting wealth, the stock market hitting record highs, the labour market slowly improving and even the business investment outlook edging up, there were reasons for cautious optimism.

A few months on, and that good news has not only stalled, but has gone into rapid reverse.

The recent GDP figures showed economic growth of just 0.5 per cent in the December quarter, with annual growth a soggy 2.2 per cent.

This brings to a total of more than two years where quarterly GDP growth has averaged just 0.5 per cent, which is about one-third less than growth should be.

A per capita recession?

The picture is more disturbing in per capita terms.

Australia’s population growth has averaged 0.4 per cent per quarter over recent years. This means that to maintain steady economic output per person, GDP growth needs to be 0.4 per cent.

Since the December quarter 2017, quarterly per capita GDP growth has averaged a miserable 0.1 per cent, with a per capita GDP recession registered in the second half of 2018.

This suggests close to zero improvement in living standards for the average Australian in the last two years or so, where in the prior 25 years, per capita GDP growth was around 0.3 or 0.4 per cent per quarter.

It is little wonder consumer sentiment is gloomy which is feeding into weak spending. The economy barely keeping up with the simple driver of higher population growth.

What to do about it?

The Reserve Bank of Australia has reacted to the growth disappointment and escalating downside risks on the economy by cutting interest rates to 0.5 per cent. It has signalled that it will do more in terms of monetary policy easing if needed.

The way the economy is panning out, this seems all but certain. Most financial market participants are expecting to see official interest rates cut further and/or for there to be some form of quantitative easing.

With inflation locked below the RBA’s target and unemployment stubbornly high, more proactive commentators are calling for the RBA to consider a more aggressive policy response.

For the government, fiscal stimulus is needed. It appears that some fiscal stimulus will be announced shortly, as it works to support growth.

This is essential if the downside risks for the economy through 2020 and potentially 2021 are to be minimised. The fiscal stimulus package needs to be sufficiently large to have a material effect.

What sort of stimulus is needed?

With the economy tracking well below trend, a fiscal stimulus package that boosts economic growth by around 0.5 percentage points in each of the next two years seems a minimum.

This means that the annual cost, over two years, will be of the order of $20 billion.

Anything less than that will be too little and will mean growth remains sluggish over the medium term.

Cash needs to be injected into the economy, to get consumer and businesses to spend, invest and hire.

It also means that the budget surpluses for the next few years will disappear. Those surplus were gone in any event, with the weak economy and costs associated with the bushfires and coronavirus undermining revenue and boosting government spending.

It also means net government debt will rise to fresh peace-time highs.

That said, it is encouraging to see an economic policy response to the severe challenges facing the Australian economy.

The big question for businesses and consumers will be is it enough? Or is it already too little, too late?

Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.

Follow Yahoo Finance Australia on Facebook, Twitter, Instagram and LinkedIn.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting