Is the Australian economy going backwards?

The news on economic growth is shockingly weak. GDP fell a stunning 0.5 per cent in the September quarter to register only the fourth decline in the last 25 years. It was the second worst GDP result since 1991. It is not good news given the ‘normal’ or long run average rate of quarterly GDP is around 0.75 per cent.

The shock GDP crash follows a raft of other surprisingly poor news on the economy since the July election, where the Coalition campaigned and won on an economic platform of “jobs and growth”. Employment has dropped an alarming 25,700 since the election, as employers have shed staff in reaction to the shrinking economy.

Also read: Aussie economy facing big global headwinds

At the same time, annual growth in wages has dropped to an all time low, which is undermining household incomes and with that, the spending power of consumers. It is little wonder household spending growth remains weak and consumer sentiment is hovering around its long run average level. Reflecting these moribund conditions in the economy, underlying inflation has fallen to a record low as firms increasingly resort to price discounting to sell their products.

The pieces of the ‘weak economy’ jigsaw fit together rather nicely in terms of economic theory, but not so well in terms of the harsh reality of a stalled economy. No one wants to see economic weakness.

While it is still early days to be making a definitive forecast for the December quarter GDP result, the early indications from some of the partial economic indicators are at best mixed. While retail sales were solid in October, building approvals collapsed. Housing finance levels and credit growth are tepid, at best, while the capital expenditure plans of the business sector remain soft.

While a recession remains very unlikely, perhaps a scenario of sluggish economic activity, with very low inflation and wages growth is on the cards for 2016.

The run of recent economic news also suggests that the macroeconomic policy settings are too tight. That means interest rates are too high for current economic conditions and the government’s strategy of returning to budget surplus may be too much too soon for the economy to digest.

The RBA decided not to cut interest rates at its meeting yesterday, which at the margin, limits the ability of the economy to grow. It was a dreadful decision, based on their head-in-the-sand forecasts and not the hard data on the economy. It was a mistake in other words and the RBA needs to cut rates again – and soon.

Also read: Why we shouldn't pencil in RBA rate hikes until 2018

The government will present its Mid Year Economic and Fiscal Outlook on 19 December and on present indications, it will be more inclined to be trimming spending and collecting more tax, which is also not helpful for growth and jobs. Perhaps some fiscal stimulus is needed to grow the economy.

It is to be hoped the huge fall in GDP in the September quarter was a one-off, a quirk in the data where everything that could go wrong, did go wrong. Even if it is and the economy grows in the next few quarters, the economy is hardly poised for a period of strong growth and that is a concern.

Stephen Koukoulas is a Yahoo7 Finance expert with more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.