General News
6 September, 2024
The RBA's 'narrow path' has just shrunk
Smashing the economy is not the way to save it.
Wednesday's dismal growth data makes it harder and harder to believe the RBA's oft-repeated claim it is following a "narrow path" to a "soft landing".
The Treasurer Jim Chalmers is clearly a sceptic given his recent claims the RBA's interest rate hikes were "smashing the economy".
Its hard to disagree with that given that, at just 0.2 per cent for the June quarter and 1 per cent over the past 12 months, economic growth is the weakest it has been since Paul Keating's "this is the recession we had to have" more than 30 years ago.
While the economy is not yet in a technical recession, it is locked into what is called a per capita recession. That is when the only factor keeping nominal growth above zero is an increase in population which artificially boosts economic demand.
If it wasn't for recent record immigration (coupled with high levels of spending by the federal and state governments) it is probable that Australia would now be in its third - or possibly fourth - quarter of negative growth.
Two consecutive negative quarters is a recession. If a recession lasts for more than two years that is generally considered to be a depression.
To put that into perspective, Australia has now experienced six consecutive quarters - or 18 months - of a per capita recession.
As one economist has said, the difference between a per capita recession and a technical recession is purely academic for most people: "It feels like a [technical] recession for many Australians despite economic growth remaining positive and unemployment relatively low," Callum Pickering of job site Indeed said.
It is also important to note that while recent consumer price index data was slightly better than some had expected it had been massaged by cost-of-living relief - including power bill rebates - being handed out by the federal government and state governments ahead of looming elections.
These are nothing more than taxpayer-funded sugar hits with many economists saying that as soon as the subsidies are absorbed that inflation will kick up once more. It is, as de Tocqueville famously observed, a case of "bribing the people with their own money".
That's certainly the view of the RBA, which has made it very clear that it has no intention of starting to reduce interest rates in this calendar year.
Having given borrowers inaccurate forward guidance on future interest rate movements in 2021 and 2022, failing to start increasing rates at the same time as much of the rest of the developed world in 2021-2022, and then by not raising the rate to the same levels as the US, New Zealand and elsewhere in 2023 the RBA has not just helped to create the inflation and cost-of-living crises, it is also responsible for perpetuating them.
New Zealand cut its interest rate by 25 basis points in August and is expected to make further cuts totalling another 50 basis points before the end of the year.
America's Federal Reserve is also expected to deliver at least two rate cuts in the next four months.
If, as appears almost certain, the RBA continues down its current path there is a serious risk that unemployment will soon begin to climb. If it is serious about locking in almost historically low jobless rates while reducing inflation it will have to start cutting interest rates before the end of 2024.
With both the ALP and the LNP committed to reducing immigration it is now only a matter of time before the country moves into a technical recession.
That is something that nobody, including the board of the RBA, which would bear most of the blame as politicians duck for cover, wants to see. Smashing the economy is not the way to save it.