Australian economy tapping out as fuel runs low
The Australian economy is now a bit like a car that is struggling to get up a hill.
At the bottom of the hill – the depths of the COVID pandemic – a whole lot of fuel was added to the tank in terms of government payouts to try to keep the economy ticking over as employment and running a business became really difficult.
Perhaps unsurprisingly, the billions of dollars of government stimulus paid out was far more than was actually needed so the Australian economic car started accelerating up the hill with a fair head of steam.
As the effect of that stimulus began to wane and the household savings that had been put aside began to fall, the speed of the car started to slow.
Immigration pushes growth higher
Record immigration continued to push the car along and continue the momentum but the rapid rise in interest rates to fight inflation and record levels of tax payments kept slowing the car down.
Which brings us to the current state of affairs, in which the Australian economy slowed down to just 0.1 % growth in the first three months of this year, marking down annual growth to just 1.1% – the lowest level since December 2020.
That means we are at a very delicate juncture with the economy actually shrinking in per capita terms by about 1.3% (as calculated by the Institute of Public Affairs) – which is how most of us actually experience the economy.
Many of us are already feeling like it’s a recession
That means in personal and household terms, most of us are already experiencing a recession.
Of course, these numbers are already well out of date so it is debatable whether the raw economic growth numbers will have totally flatlined before the next big shot of stimulus arrives to fuel up the car in the form of the July tax cuts.
That leads to an intriguing second battle which will all depend on whether the Australian economy car just crests the hill and begins to pick up some more speed again or loses momentum entirely and runs backwards into recession.
Bullock ready for rates action – one way or the other
As Reserve Bank Governor Michele Bullock has made clear, she stands ready to take decisive action on interest rates and that includes both directions.
While it is more likely that the RBA will be cutting rates rather than raising them – after all, countries such as Canada and the European Central Bank have already flicked the switch to cutting rates – but there is still a slim chance that rates could go higher should inflation remain higher than anticipated.
Such a scenario though relies on some remaining strength in the economy to put upward pressure on prices which seems unlikely, given that there have now been five consecutive quarters of falling growth and domestic final demand was down to just 0.2% for the March quarter.
Of course, you need to be careful what you wish for because should Michele Bullock flick the switch for lower rates, that could be due to the car really running out of steam and the economy starting to contract and weaken significantly.
It will all depend on whether the kick start from the tax cuts produces enough fuel to speed the car up for a while longer – something we will all be watching carefully as circumstances collide into a very evenly poised situation for the Australian economy.