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RBA warning as Australia's underground recession continues

OPINION: An interest rate cut should be on the agenda at the RBA's next meeting on March 19.

Before we get into the latest installment of bad economic news, let’s start with a quiz on economics and interest rates.

When interest rates are hiked at a record pace and by a record amount, guess what happens to the rate of economic growth? If you answered, “It weakens sharply”, or words to that effect, you are correct.

Between May 2022 and November 2023, the Reserve Bank (RBA) increased official interest rates by an unprecedented 425 basis points. As a result, the economy stumbled, with slower and slower economic growth, and the news is getting worse.

Composite image of RBA governor Michele Bullock talking about interest rates, and pedestrians crossing a Sydney street.
The RBA's aggressive run of hiking interest rates has hit the economy hard. (Getty)

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Figures released today show GDP rose by just 0.2 per cent in the December quarter of 2023. This followed weak growth of 0.3 per cent in the September quarter, 0.5 per cent in the June quarter and 0.6 per cent in the March quarter. This deceleration in growth clearly gathered pace through 2023 as the RBA smashed consumer spending with its interest-rate-hiking obsession.


In per-capita terms, which allows for population growth, GDP growth for the past four quarters has been -0.3 per cent, -0.5 per cent, -0.2 per cent and 0.0 per cent. Outside the COVID pandemic, this is one of the weakest runs of per-capita GDP since the early 1990s recession.

The slump in per-capita output is a fundamental reason why consumers are feeling financial pressures and the level of consumer sentiment remains near record lows.

The marked slowing in the economy to a sub-optimal pace explains why the unemployment rate is rising at an alarming speed and inflation is free-falling.

As noted recently, the unemployment rate has risen from a low of 3.4 per cent a little over a year ago to now be at 4.1 per cent, and the way the economy is stumbling along, it won’t be long before it hits 4.5 per cent, with the risks of a move to 5 per cent.

Inflation, at the same time, has fallen from an 8.4 per cent peak in December 2022 to 3.4 per cent in January 2024 and, as certain as night follows day, it will fall to the RBA target of 2-3 per cent by the middle of the year. The risk is that it falls too far, towards 2 per cent or less, given the slack in the economy.

In simple terms, the RBA made mistakes with its interest-rate-hiking cycle during 2023, especially with the rise in November. The level of interest rates is too high and if they stay at these restrictive levels much longer, an already weak economy will cascade into a deeper slump.

It may already be too late to change the momentum towards severe weakness over the next few months but a series of interest rate cuts, starting in May – at the latest – will guard against a protracted and especially nasty downturn that lingers into late 2024 and 2025.

Also by the Kouk:

At the start of 2024, it looked like the RBA would need to cut official interest rates by around 100 basis points – a full percentage point, in other words – to prevent severe economic weakness and in reaction to falling inflation.

This remains a reasonable outlook given the run of news in the past few weeks, including the disappointing GDP data for the December quarter.

The next meeting of the RBA is March 19 and the case for an interest rate cut will likely be discussed. A move at that time remains a low probability considering the about face needed from it given its recent actions and rhetoric surrounding the economy.

The meeting after that, on May 7, is genuinely ‘live’ for the RBA to deliver the first interest rate cut in the cycle. At that time, it will have before it two more labour-force updates, the March-quarter inflation data and leads from the global economy on growth and inflation risks.

It won’t take too much for the news to be such that a 25-basis-point interest rate cut is delivered.

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