Troubling Australian economy set to deliver brutal 'double whammy': 'It matters for you'

Australia's economy rose by a disappointing 0.1 per cent in the March quarter, while the annual increase was 1.1 per cent. (Source: Getty/ABS)

The bad news on the economy continues to flow. And it matters for you, your job prospects, wages, investments and interest rates, albeit with some silver lining in the dark clouds of a weak economy.

This time it is the national accounts data and the rate of GDP growth in particular that are painting an ugly picture for the economy in the early part of 2024.

In the March quarter, real GDP rose by a disappointing 0.1 per cent, following growth of 0.3 per cent, 0.2 per cent and 0.4 per cent in the previous three quarters, respectively. The annual increase in GDP was just 1.1 per cent which outside the period of the pandemic, is the weakest result in three decades.

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Recall that in a ‘normal’ economic environment, quarterly GDP growth is usually around 0.7 or 0.8 per cent on average with annual growth around 3 per cent.

Australia in 2024 is a long way from that.

There was nothing in the so-called building blocks of the GDP data to give confidence that the economy will pick up any time soon. On the contrary – the details of the GDP result were particularly troubling.

With household saving hovering just above zero, it is clear consumers are under severe financial stress just to meet their essential spending on rent, mortgages and non-discretionary areas of survival.

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What’s also worrying is that a sharp accumulation in inventories prevented GDP growth being negative, dwelling investment fell and net exports were a drag on the economy.

Another rate hike, which was always a figment of some wild imaginations, would be a disaster.

Indeed, the rate cut scenario is set to regain popularity especially if, as is certain, the unemployment rate keeps rising in the months ahead. The Reserve Bank of Australia is forecasting the unemployment rate to peak at 4.3 per cent, which is a mere 0.2 percentage points from the current rate which in turn is yet to fully reflect the shockingly weak GDP data.

Indeed, it is fanciful to think that economic growth at 1 per cent per year, even 1.5 per cent, will see the unemployment rate remain below 4.3 per cent.

Given the depth of the downturn and the sluggishness in the economy, the unemployment rate will easily exceed 4.5 per cent and head towards 5 per cent unless the RBA moves to ease monetary policy.

Every cloud has a silver lining

The consolation of weak economic activity and rising unemployment is further declines in inflation and with that, lower interest rates.

Soon, but not yet.

The RBA still has a bee in its bonnet about the time it is taking to get inflation back to its 2 to 3 per cent target even though every indicator is pointing to it happening before the end of 2024.

This timidity towards embracing the disinflation outlook and its insistence that the unemployment rate will peak at 4.3 per cent need to be blown out of the water for it to move to cut interest rates.

Which makes the run of labour force and inflation data the critical elements for interest rates in the next few months.

When the double-whammy of yet higher unemployment and even lower inflation are reached the RBA will move to trim interest rates. The June quarter inflation data are due for release on July 31, with the July data – which will include the deflationary effects of the electricity and rental subsidies – on August 28 set to be critical inputs to the interest rate cut decision.

Add to that the regular monthly labour force releases which by August are set to show unemployment approaching 4.5 per cent means the RBA meeting of September 23 and 24 will have a serious discussion about interest rate cuts.

It is also worth noting that by then, the global economy is set to see interest rate cutting cycles underway in the Eurozone, Canada, the UK, Sweden, Switzerland, Brazil and probably a range of other countries.

This would be a good time for the RBA to join the rate cutting bandwagon.

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