With the population expanding faster than output, the country has effectively slipped back into a per capita recession. This is not the first time economic output has failed to keep pace with population growth. Nine out of the last 11 quarters have seen the same trend.
Compared to three years ago, the average Australian is now producing 1.7 per cent less. It’s a concerning sign for policymakers and a clear indication that the current trajectory may not be sustainable.
But beneath the gloom are signals that may offer some optimism. There may even be justification for the Reserve Bank of Australia (RBA) to cut interest rates sooner rather than later.
Firstly, natural disasters such as Cyclone Alfred have impacted short-term activity but are expected to drive GDP upward in the coming quarters.
Secondly, the drag on growth came largely from the public sector, where infrastructure investment has slowed. This gives the private sector space to step up without being crowded out.
Thirdly, incomes are on the rise. Business profits, wages, and rents grew faster than inflation.
After hitting a post-COVID low of 1.5 per cent in late 2023, the household savings rate has rebounded to 5.2 per cent. This suggests Australians are choosing to bank their gains rather than spend them. This is likely a reflection of economic uncertainty and still-high interest rates.
The RBA now faces a pivotal decision. With inflation under control and economic momentum fading, there is a strengthening case for lowering the cash rate. Markets are already pricing in a strong likelihood of a July rate cut, with another potentially following in August. Some projections now see the cash rate falling from 3.85 per cent to as low as 3.1 per cent by year’s end.
The central bank has already indicated it considered a 0.5 percentage point cut before opting for 0.25. That suggests it is ready to act more decisively if needed. And with global headwinds waiting too long could be a risk in itself.
If the goal is to reignite household spending and private sector investment, reducing the cost of borrowing appears to be the clearest path forward. With the savings rate stabilising and wage growth showing signs of life, further rate cuts could help shift consumer behaviour from cautious saving to confident spending.
Australia may still be walking a narrow path, but without timely support from the RBA, the risk of losing its footing is becoming increasingly real.
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