Financial system slows to a crawl as customers reduce spending

Australia’s economic system is slowing quickly as households slash spending and raid financial savings to beat the cost-of-living disaster, in accordance with new development knowledge that would depart the RBA “nervous”.

Official figures revealed on Wednesday revealed the nation suffered a torrid begin to 2023, with gross home product (GDP) rising simply 0.2 – the slowest for the reason that depths of 2021’s lockdowns.

It’s brought on by households chopping again on non-essentials like furnishings, family electronics and automobiles as they face rising rates of interest and excessive inflation.

And it may worsen from right here, economists warn, with extra rate of interest hikes on the horizon after productiveness development – a carefully watched metric on the RBA – fell in need of central financial institution hopes.

It comes after RBA governor Philip Lowe warned on Wednesday morning that the central financial institution is strolling a wonderful line between curbing inflation and sparking a downturn that prices many roles.

The chance of such a contraction is rising with every charge hike, however Dr Lowe stated extra will increase could also be wanted until a soar in productiveness prevents new-found wages development from fuelling inflation.

However, sadly, there have been no indicators of a productiveness rebound in Wednesday’s figures, BIS Oxford Economics Australia head of macroeconomic forecasting Sean Langcake stated.

“The RBA might be fairly nervous about what the productiveness development numbers imply for providers inflation,” he stated.

“We’re extra seemingly than to not get one other charge hike.”

‘Brace your self’

The expansion slowdown over the March quarter was anticipated, however it nonetheless makes for grim studying.

Consumption development slowed to 0.2 per cent on the again of a 1 per cent fall in discretionary spending, whereas the family financial savings ratio fell to three.7 per cent – the bottom stage since 2008.

Treasurer Jim Chalmers stated it wasn’t shocking that households are feeling the monetary strain amid the quickest rate of interest will increase on report and the best inflation charge in 30 years.

“Households have pulled again on discretionary spending to make room for necessities,” he stated on Wednesday.

“Mortgage curiosity bills additionally doubled over the 12 months to the March quarter.”

Mr Langcake stated the buyer retreat is a “brace your self” second for the slowing economic system.

“We’re lucky that we’re coming from a really robust place to begin,” he stated. “And if issues do go sideways we do have methods to loosen coverage levers.”

A client retreat is dangerous information for the entire economic system as a result of home consumption usually accounts for greater than half of general development.

A nationwide recession continues to be seen as unlikely, largely due to inhabitants development, however many economists are predicting a per capita recession as household budgets weaken.

That means that even when the complete economic system doesn’t goes backwards, it could nonetheless really feel like a downturn for a lot of households as monetary stress soars and costs for important payments maintain going up.

KPMG chief economist Brendan Rynne stated per capita GDP development was damaging within the March quarter, making the June-quarter figures pivotal.

“With the March-quarter outcome reflecting weakening situations, KPMG’s view is that the economic system will decelerate additional, although [it] will keep away from recession,” Dr Rynne stated.

“That danger, nevertheless, is growing and the RBA’s hoped-for mushy touchdown is trying more and more illusory.”

Extra charge hikes?

The outlook for charges is trying worse after the RBA hiked once more earlier this week.

Dr Lowe stated on Wednesday that the June charge improve was handed to present central bankers extra confidence that inflation is falling quick sufficient to stop increased costs from changing into entrenched.

The RBA had been anticipated to complete elevating charges in early 2023, however economists say its inflation-reduction technique may very well be derailed by rising wages development and low productiveness.

In different phrases, whereas the RBA believes increased wages development is in keeping with inflation falling again to the goal band, that’s solely prone to occur if productiveness returns to pre-COVID ranges.

Wednesday’s figures weren’t encouraging on that entrance – manufacturing per hour labored fell 0.3 per cent on the quarter and is down 4.3 per cent yearly, whereas unit labour prices rose 1 per cent.

ANZ Financial institution is now predicting at the least another rate of interest hike in August, whereas different key forecasters are presently rethinking what the RBA will do after its shock hike in June.