Australia’s ‘per capita recession’ as RBA extends rate pause

Australia has slipped into a ‘per capita recession.’ The June quarter national accounts showed real GDP per capita falling by 0.3 per cent for a second consecutive quarter as output failed to keep pace with rapid population growth. So, although the economy overall continued to expand at a quarterly rate of 0.4 percent, supported by trade and investment, and although the annual rate of GDP growth even managed to do a bit better than market expectations, the headline news this week was the fall in living standards. Get the full details below. 

Of course, this means that the RBA’s monetary policy tightening is acting broadly as intended, slowing economic activity by squeezing household consumption as the central bank seeks to bring demand back into balance with supply. At its monetary policy meeting this week – the final one for Governor Philip Lowe – the RBA decided to leave the cash rate target unchanged for a third consecutive month. Granted, the GDP numbers were published the day after the RBA Board meeting but, aside from some grim news on productivity, there was nothing in the national accounts that would have swayed this week’s decision towards further policy tightening. More generally, with Martin Place judging that ‘recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon’, there is currently no sign of a pressing case for additional rate hikes.

More details on GDP and the RBA below as well as the usual overview of the week’s other data releases. I am on the road this week, which means that I’ve had to keep things a bit shorter than would normally be the case for a ‘GDP plus RBA’ week. Apologies to those readers who miss the deeper dive into the national accounts this time.

Headline growth beats expectations but goes backwards per capita

The ABS said that real GDP grew by 0.4 per cent (seasonally adjusted) over the June quarter 2023 to leave output 2.1 per cent higher than in the same quarter last year. The quarterly rate of growth was in line with market forecasts while the annual result beat the consensus prediction of a 1.8 per cent print, due to revisions to quarterly growth in Q1:2023 (up to 0.4 per cent from the previous estimate of 0.2 per cent).

The economy has now grown for seven consecutive quarters. However, it isn’t managing to keep pace with population growth. In per capita terms, real GDP fell 0.3 per cent quarter-on-quarter, repeating the March quarter’s outcome. That means that Australia has fallen into a technical ‘per capita recession’. (A technical recession is two consecutive quarters of negative real GDP growth. Australia has had positive real GDP growth in the March and June quarters of this year but negative growth in per capita GDP – hence a per capita technical recession.) Real GDP per capita was also down over the year, again falling by 0.3 per cent.

For FY2022-23 overall, real GDP growth ran at an above-potential 3.4 per cent, although this strength largely reflects the back-to-back 0.7 per cent quarterly growth rates in the second half of 2022 as the economy experienced a period of post-pandemic payback.

By expenditure component, GDP growth in the June quarter was driven by a combination of investment and net exports. Total gross fixed capital formation rose 2.4 per cent over the quarter and 4.7 per cent over the year, contributing half a percentage point to quarterly GDP growth. Within that total, public investment jumped 8.2 per cent quarter-on-quarter and 8.8 per cent year-on-year, making a 0.4 percentage point contribution. According to the ABS, this was driven by spending on health and transport infrastructure as well as on national defence. Private business investment was up 0.6 per cent over the quarter and 8.2 per cent over the year, contributing a further 0.1 percentage points. The ABS said that the key driver there was a 4.3 per cent rise in new machinery and equipment, led by investment in light and heavy vehicles and other transport equipment. In contrast, dwelling investment fell 0.2 per cent over the June quarter and dropped 1.1 per cent over the year.

Net trade contributed about 0.9 percentage points to quarterly growth, as a 4.3 per cent rise in exports of goods and services comfortably outpaced a 0.7 per cent increase in imports. On the export side of that equation, the ABS highlighted an 18.5 per cent jump in exports of travel services as international student and tourist numbers continued to rebound from the pandemic, along with an 11 per cent rise in the volume of coal exports and 4.9 per cent growth in the export of other mineral fuels including LNG.

In contrast to the trade and investment narrative, the contribution from real household consumption was much more subdued, at just 0.1 percentage points. Households’ consumption spending only edged up by 0.1 per cent over the June quarter, with annual growth running at 1.5 per cent, implying that consumption went backwards in per capita terms. Spending on essential goods and services rose 0.5 per cent quarter-on-quarter and 2.1 per cent year-on-year, driven by rent and other dwelling services, electricity, gas and other fuel, and insurance and other financial services. Meanwhile, discretionary spending fell for a third consecutive quarter, dropping 0.5 per cent from Q1:2023, although it was still 0.6 per cent higher in annual terms.

That soft consumption outcome reflects the ongoing squeeze on household budgets. Turning from real to nominal terms, while household gross income rose 1.8 per cent over the quarter, income payable increased by 3.7 per cent, propelled by a 10.9 per cent rise in interest payable on dwellings and a 2.2 per cent lift in income tax. The Bureau reports that households made $82.8 billion in mortgage interest payments over the year, which was roughly double the amount paid in the previous year. With the increase in nominal consumption running faster than the rise in disposable income, the household saving ratio fell from 3.6 per cent to 3.2 per cent and has now dropped to its lowest level since the June quarter 2008.

Nominal GDP fell 1.2 per cent over the June quarter but was up 3.6 per cent relative to the same quarter last year. Australia saw the largest fall in its terms of trade (a 7.9 per cent quarterly drop driven by an 8.2 per cent decline in export prices) since the June quarter 2009. That shift in the terms of trade also means that the fall in Australian living standards was greater than indicated by the drop in real GDP per capita. Real net national disposable income per capita, which accounts for shifts in the terms of trade as well as the impact of international flows of income, dropped by 2.1 per cent over the quarter.

Finally, the June quarter national accounts also brought more bad news on labour productivity. GDP per hour worked slumped two per cent over the quarter to be down 3.6 per cent over the year.

Governor Lowe exits without a farewell rate hike

At its monetary policy meeting on 5 September 2023, the last one for outgoing Governor Philip Lowe, the RBA decided to leave the cash rate target unchanged at 4.1 per cent. Australia’s central bank has now been on hold for three consecutive meetings, with the last 25bp rate hike delivered at the 7 June 2023 meeting. We’d noted last week that another pause was the most likely outcome and no change was also very much the consensus view following last week’s softer-than-expected July monthly inflation reading.

The statement accompanying this week’s meeting explained the latest decision to pause in by now familiar terms, citing the 400bp of policy tightening already delivered since the RBA started hiking in May 2022, the central bank’s assessment that those rate increases were not only working already to  ‘establish a more sustainable balance between supply and demand in the economy’ but would continue to do so, and the judgement that given prospects for the economy remained clouded by uncertainty, it made sense to ‘take further time to assess the impact of the increase in interest rates to date and the economic outlook.'

At times, the statement seems almost cheerful, noting that:

‘The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong, and the economy is operating at a high level of capacity utilisation, although growth has slowed.’

In other words, the RBA can still foresee a (relatively) soft landing for the economy. Of course, the commentary does then go on to flag the various risks to this outcome, including the threat of services price inflation turning out to be unpleasantly persistent, unknowns relating to the future trajectory of household consumption and to the way prices and wages might respond in future to the combination of a slowing economy but still-tight labour market, and worries around the lagged effects of monetary policy. The statement also flags ‘increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.’

All of which leaves the central bank in a similar position to the one it was in following last month’s meeting, which is reflected in the fact that the concluding paragraph of this month’s statement is almost identical to the corresponding final paragraph in the August statement, except for the minor addition of the two words underlined below:

‘Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.’

That means we remain in the same data-dependent environment that has shaped the past three monetary policy meetings, which – as we’ve argued several times now – also implies that we will only see another rate rise from here if there are surprises in the data indicating an upside risk to inflation.

Will this week’s GDP result (which came after the RBA meeting) change the thinking at Martin Place? It seems unlikely to do so. After all, a slowing economy is what the RBA set out to achieve by tightening monetary policy, and the signs of consumer weakness are broadly in line with its own risk assessments. That said, the central bank will not be pleased by the poor productivity numbers, as it continues to signal that current and projected wage growth will only remain consistent with returning inflation to target ‘provided productivity growth picks up’. The June quarter national accounts showed no sign of that happening yet.

What else happened on the Australian data front this week?

Australia recorded a current account surplus of $7.7 billion in the June quarter of this year (seasonally adjusted), down $4.8 billion from the (revised) March quarter 2023 surplus of $12.5 billion. According to the ABS, the main driver was an $8 billion fall in the balance on goods and services, reflecting a seven per cent drop in export values (the biggest seen since the June quarter 2014) due to falling prices for key export commodities such as coal and LNG. As noted above, those price shifts also saw our terms of trade (the ratio of export to import prices) weaken by 7.9 per cent – the largest decline since the June quarter 2009. The drop in the trade surplus was partly offset by a $3.2 billion decline in the primary income deficit, as lower commodity prices also contributed to a decline in profits sent to overseas investors.

The ABS also reported that Australia ran an $8 billion trade surplus (seasonally adjusted) in July this year. That was down $2.2 billion from the June result, reflecting a near-billion dollar decline in the value of goods exports and a more than a billion dollar increase in goods imports.

The ANZ Roy Morgan Consumer Confidence Index rose 0.6 points to an index reading of 78.7 in the week ending 3 September 2023. Although that meant the index once again remained below 80, it did see confidence climb to its highest level since April this year. ANZ attributed the increase to last week’s softer-than-expected monthly CPI result.

The ABS Business Indicators Australia for the June quarter 2023 reported that company gross operating profits fell 13.1 per cent over the quarter (seasonally adjusted) and dropped 11.8 per cent over the year, with a 21.3 per cent fall in mining profits driving the overall quarterly decline. Wages and salaries were up 1.8 per cent quarter-on-quarter and 9.9 per cent year-on-year.

The ABS said that Australia’s general government net operating balance rose $25.8 billion to $32.5 billion in the June quarter of this year. That was up from an operating balance of $6.6 billion in the March quarter, with the rise driven by a 23.7 per cent jump in tax revenue.

ANZ-Indeed Australian Job Ads rose 1.9 per cent over the month in August (seasonally adjusted) following an upward revision in July to 0.7 per cent monthly growth from 0.4 per cent. Numbers were down 7.7 per cent over the year and 7.8 per cent lower than their September 2022 peak but remain well above pre-COVID levels. According to ANZ, recent job ad growth has been concentrated in education and healthcare, as well as retail, and has been driven by New South Wales and Queensland. In contrast, ANZ said tech opportunities have fallen throughout the year.

The ABS monthly household spending indicator reported that spending in July 2023 fell 0.7 per cent over the year (current price, calendar adjusted basis). The Bureau said that this was the first time since February 2021 that the spending indicator had fallen. Relative to July 2022, household spending on services was up 2.4 per cent while spending on goods fell 4.1 per cent. Over the same period, non-discretionary spending rose 1.7 per cent (the lowest growth rate since early 2021) while discretionary spending fell 3.3 per cent, falling for a fourth consecutive month.

Last Friday, CoreLogic reported that its national Home Value Index (HVI) rose for a sixth consecutive month in August 2023, climbing by eight per cent. That still left the HVI down 1.1 per cent relative to August 2022, but it means that the index has risen 4.9 per cent from its February 2023 low.  The combined capitals index rose by one per cent over the month and was down just 0.1 per cent in annual terms. CoreLogic noted that Sydney has led the recovery to date, with values up 8.8 per cent from their January 2023 floor, followed by Brisbane (up 6.2 per cent from February). The data provider also said that lower-than-average advertised supply levels remained a key factor in supporting gains in home values, with advertised levels 15.5 per cent lower than the same time last year across the combined capitals and almost 19 per cent below their five-year average. Purchasing activity was also thin. Still, it also described the housing recovery as ‘firmly entrenched’ with the headwinds of rising stock levels, thin levels of activity, low consumer sentiment and a rising number of households facing mortgage stress offset by falling inflation and (therefore) a receding risk of further interest rate rises, low unemployment and strong population growth in the absence of any significant supply response.

CoreLogic also said that the national rental index rose by 0.5 per cent in August to be nine per cent higher in annual terms. August’s result was the 36^th consecutive monthly rise but also the smallest monthly gain since November 2020 and the lowest annual gain since April 2022 (albeit almost three times higher than the decade average annual growth of 3.2 per cent). The slowdown in rental growth took place despite a further tightening in vacancy rates which across the combined capitals fell to 1.1 per cent, around record lows.

Also on Friday, the ABS said that the value of  new loan commitments for housing fell 1.2 per cent over the month (seasonally adjusted) in July 2023 to be 14.1 per cent down in annual terms.  The value of lending to owner occupiers was down 1.9 per cent month-on-month and 17.5 per cent over the year while lending to investors slipped lower by 0.1 per cent in monthly terms and fell 7.2 per cent in annual terms.

Other things to note . . .

• Outgoing RBA Governor Philip Lowe’s closing remarks included a call to rethink the way Australia conducts fiscal policy, a rejection of arguments to change the inflation target and a diagnosis of productivity as primarily a ‘political problem.’
• The RBA chart pack for September 2023.
• From the ABS, 11 things that happened in the Australian economy during the June quarter.
• Also from the Bureau, ABS Insights into Government Finance Statistics for the June quarter 2023.
• Productivity Commission Deputy Chair Alex Robson’s recent speech on Optimal Industry Policy warned of ‘substantial risks’ in the Mission Economy approach advocated by economist Mariana Mazzucato.
• Grattan’s Tony Wood on Australia’s power struggle.
• John Quiggin reckons that recent calls to raise the rate of GST will go nowhere.
• Why isn’t Canada an economic giant? (FT).
• The IMF reviews Saudi Arabia’s economy.
• Institutional Investor on how AI is making prediction more precise but also with some scepticism about the current bout of AI mania.
• Harold James on what economic history can teach us about productive vs unproductive crises.
• Why central banks might be getting it wrong by focusing on the labour market as a guide to inflationary pressures. (WSJ)