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Why Australia is heading towards a per-capita recession

While it’s not a full-blown recession, it sure feels like one for everyday Australians.

Economic RBA boss Philip Lowe is wearing glasses and speaking at an event.IN the other pic shoppers in the Sydney CBD walk past the Queen Victoria Building.
Economic growth is slowing, leading to concerns Australia is heading towards a per capita recession. (Source: Getty)

The economic news continues to show a troubling slump in activity, not that the Reserve Bank (RBA) seems to notice or care.

Economic growth is slow and slowing further, the unemployment rate is rising, and output per person is going backward. Despite the handwringing, inflation is falling too. It is not a great picture and is being made more problematic by the hair-trigger approach to interest rates from the central bank.

The key data points from the March quarter national accounts were quarterly GDP (Gross domestic product - or how we measure production) growth of just 0.2 per cent, which followed growth of 0.6 per cent in the December quarter. With the population growth booming, in per-capita terms, GDP actually fell 0.2 per cent following almost no growth - plus 0.1 per cent - in the prior quarter.

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What this means in annual terms is that the Aussie economy slowed to a growth rate of 2.3 per cent.

It is little wonder the household sector is under extreme pressure and consumer sentiment is tracking at or near record lows. And the data available at the moment actually pre-dates the effect of the extreme hikes in official interest rates, which were added to this week with an unexpected move by the RBA, which took the cash rate to 4.1 per cent.

What is a per-capita recession?

A per-capita recession is where the economy continues to grow but the standard of living for people is falling. Some call it the recession you have when you're not having a recession.

The most severe weakness in the economy is in household spending. It rose by just 0.2 per cent in the March quarter after a tepid rise of 0.3 per cent in the December quarter. Both of these growth rates were below the increase in population, which suggests some form of per-capita household recession is underway.

The concern for the household sector was that this severely constrained spending was funded by a scaling back in the saving ratio, which fell to just 3.7 per cent of household income - the lowest in 15 years.

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It seems likely - for many households and the economy more broadly - the household saving ratio will turn negative as people dip into their savings to pay mortgage costs, while dealing with still-extreme cost-of-living pressures.

Other pockets of weakness in the March quarter GDP result were dwelling investment, down 1.2 per cent, and net exports, which cut 0.2 percentage points off.

The disappointing economic news came less than 24 hours after the RBA’s shock interest rate hike. This is the most extreme and fast rate-hiking cycle on record.

It is odd that the rate hike came right before the news showing the economy under severe downward pressure under the weight of earlier interest rate rises.

The market and the bulk of economists were again caught out by the RBA with their error, appearing to focus on hard data showing slower economic growth, rising unemployment, and falling inflation and overlooking the policy zealotry from the erratic and error-prone RBA.

Interest rates are clearly restrictive and are working to kill inflation, but by smashing the economy towards a hard landing.

What's going to happen for the rest of 2023?

There seems little doubt the second half of 2023 is going to present some extreme financial challenges for households and businesses alike. The unemployment rate is on track to hit 4.5 per cent within the next six to 12 months, and in what will in time be a surprise for the RBA, inflation is set to cascade lower, getting close to the 2-3 per cent target well before the RBA’s current timetable of mid 2025.

When the RBA goes rogue, it is hard to make forecasts for the next moves in interest rates. Suffice to say RBA boss Philip Lowe has only three more months in the job and his successor will take over when the economy is very weak and inflation is in free fall.

How they approach their role will be vital in determining whether oppressive monetary policy will be in place by the end of 2023.

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