The politicians have weighed in on the Reserve Bank of Australia’s
economic policy and their reticence to reduce interest rates in the face of
community pressure. We look at what the numbers are really showing.
Treasurer Jim Chalmers has stated that
global uncertainty and rate rises are “smashing the economy”.
Former Treasurer Wayne Swan weighed in and
told Channel 9 that the RBA was, “putting economic dogma over rational economic
decision making, hammering households, hammering Mums and Dads with higher
interest rates, causing a collapse in spending and driving the economy
backwards” and that the RBA was, “simply punching itself in the face.”
Australian mortgage holders and renters
have had no relief from interest rates following 13 successive interest rate
rises to the official cash rate since May 2022.
The Reserve Bank’s position and the flow
through effects
The Reserve Bank of Australia (RBA) Board opted to
maintain the official cash rates at 4.35% at its September Board meeting. The
rationale is that inflation remains persistently high and has been for the last
11 quarters. The consumer price index (CPI) rose 3.9% over the year to the June
quarter and remains above the RBA’s target range of 2-3%.
But, it is not persistently high inflation
that is causing the politicians to weigh in. RBA Governor Michele Bullock has
warned that “it is premature to be thinking about rate cuts” and “the Board
does not expect that it will be in a position to cut rates in the near term.”
The Australian Bureau of Statistics (ABS)
June Quarter National Accounts paint a bleak picture of the Australian economy.
Per capita GDP fell for the sixth consecutive quarter by -0.4% to -1.5%. The
longest consecutive period of extended weakness ever recorded.
Household spending weakest since COVID
Delta
Household spending fell by -0.2% in the quarter,
the weakest growth rate since the Delta-variant lockdown affected September
quarter 2021.
Discretionary spending – travel and
hospitality impacted most
The ABS says that we spent less on discretionary
items (-1.1%), particularly for events and travel. It will come as no surprise
that spending on hotels, cafes and restaurants was down 1.5%. Spending on food
also fell -0.1% as households looked to reduce grocery bills.
Household savings lowest since 2006
The savings ratio remains low. Households saved
only 0.9% of their income over the year. This was the lowest rate of annual
saving since 2006-07. Net savings reduce when household income grows slower
than household spending.
Economic growth from Government spending
The Australian economy did grow by 0.2%, the
eleventh consecutive quarter of growth but the growth rate was unimpressive.
The ABS says that, “the weak growth reflects subdued household demand, which
detracted 0.1 percentage points from GDP growth while government consumption
contributed 0.3 percentage points, the same contribution to growth as previous
quarter.”
Government spending increased by 1.4% over
the quarter. Commonwealth social assistance benefits to households led the
rise, with continued strength in expenditure on national programs providing
health services. State and local government expenditure also rose with
increased employee expenses across most states and territories.
The RBA’s position on interest rates
The RBA is on a narrow path. It’s trying to bring
inflation back to target within a reasonable timeframe while preserving the
gains in the labour market over the last few years. The RBA expects to reach
this target range by the end of 2025.
Through 2022 and 2023, most components of
the CPI basket were growing faster than usual (the CPI is literally a basket of
87 types of expenditure across 11 groups such as household spending, education
and transport.) Over the last 18 months, the price of goods has come down as
supply disruptions like COVID-19 and the war in Ukraine have eased, and are now
growing close to the historical average.
The key problem areas are housing costs and
services. In housing, the growth is from increased construction costs and
strong rent increases. For services, while discretionary spending is down,
as we can see from the June National Accounts, inflation in this category
remains high at 5.3% to the June quarter. Wage increases and lower
productivity, combined with the increased costs of doing business (electricity,
insurance, logistics, rent etc) are all impacting.
The RBA is keen to point out that inflation
causes hardship for the most vulnerable in our community. Lower-income households tend to allocate more of their spending toward essentials,
including food, utility bills, and rent. Higher income households tend to spend
more on owner-occupied housing as well as discretionary items such as consumer
durables.
Younger households and lower-income households have been particularly affected by cost-of-living pressures.
