Keep your eyes peeled for confirmation of economic stagnation on Wednesday. Growth in the June quarter will be negative and won’t be saved by the one-off boost from surging iron ore prices. In fact, it now looks as though growth will be negative for the quarter because of a sharp fall in business inventories — especially stocks held by retailers who have been unable to shift unsold products now for six months.
Sounds nerdy, and it is, but it reflects the central problem in the economy: weak demand from consumers and householders who are struggling with low wages growth. Retail is struggling. The National Australia Bank has twice described the sector this year as being in a “recession”. That has driven the cuts in interest rates from 1.50% to 1% by the RBA and the attempted stimulation of the economy by the tax refund from the federal government. Australians have hauled back on discretionary spending in the past 18 months to two years. Falling house prices, political instability, the bad publicity about China and Trump’s trade war have all seen business conditions and confidence fall — and consumer hopes follow.
There is an unhappy irony here that a weak retail sector and unhappy consumers have more than offset the jobs boom of the Turnbull and Morrison governments to the point where the economy has slowed to a walk. The big 0.9% fall in inventories (most of which represents unsold retailing stocks) will cut the already weak estimates for GDP (0.3% to 0.5%) by 0.6%, one of the largest in recent times.
In fact, if forecasts from most economists are right, annual growth for 2018-19 could be the slowest since 2009 or, worse still, since 2000. It’s likely that the Reserve Bank’s forecast of 1.7% growth for the year to June will prove to be too optimistic, and the most likely reading could be around 1.5% or 1.3%. The latter would be the slowest rate of growth in 19 years — that’s back in the heyday of John Howard and Peter Costello.
This unimpressive milestone will have been achieved despite the jobs boom we’ve been having since 2016 — which remains the only credible economic boast left for the Scott Morrison-Josh Frydenberg government. The prime minister and treasurer urged us on Tuesday to “look through” the soft figures to better times ahead when they reckon the economy will turn up. But there is a delicious irony here. The weakest growth figures in a quarter for a couple of years — and the weakest annual growth figures, possibly for a decade or two — was happening as the Coalition retained office in the May 18 election. This will be their slowdown — with help from the likes of The Australian Financial Review and The Australian and their cast of urgers, analysts and commentators who last year were calling for the Reserve Bank to lift rates!
At 1.5% or 1.3%, annual GDP growth would be far short of the 2.5% estimate in last December’s mid-year economic update from the Morrison government. This kind of miss should embarrass Treasury, but will the boffins acknowledge it? Growth could in fact be 1% or less if government finance statistics are weak. We know the current account figures will add around 0.2%, but the sharp fall in housing investment will be another detractor from growth.
The much-vaunted jobs boom since 2016 has done nothing to arrest the slowdown. In fact, while softening the impact at best, it’s been a fool’s paradise. The boom has boosted tax collections for the federal government to reduce the budget surplus — a useless task, at best.
The RBA — which is expected to leave rates unchanged at today’s meeting — has been pointing out the impact of this tax grab on household incomes for several months, with no reaction from the highest-taxing government in years. If the RBA does surprise with a rate cut, the message will be that it now sees the economy heading to less than 1% annual growth, with an attendant sense of helplessness.
Activity in the domestic economy continues to slow with weak wages growth; static retail sales volumes in the March and June quarters (hence the surge in unsold stocks) and last week’s data; a 0.5% fall in private investment in the June quarter; and a 3.8% slump in the value of construction work done in the same period.