GDP numbers argue for more RBA interest rate cuts as savings rise and spending flatlines

Australia is teetering on the brink of falling back into a per capita recession, but the bad news could soon be good news for borrowers.

The latest National Accounts published by the ABS show Australia’s economy inched forward by just 0.2 per cent over the first three months of this year.

Over the year to March 31, economic activity increased by just 1.3 per cent.

Over both the past quarter and the past year, Australia’s population grew much faster than its economy.

Per person, our economic output is 0.4 per cent less than it was a year ago.

As IFM Investors chief economist Alex Joiner pointed out, economic growth has failed to keep up with population growth for nine of the past 11 quarters.

Per person, Australia now produces 1.7 per cent less than it did around three years ago.

On the surface, it’s a grim picture, but the details show there is room for some optimism.

First up, Cyclone Alfred brought great disruption and damage to heavily populated areas of south-east Queensland and northern NSW.

The repair jobs to fix that damage will add to GDP over the current and coming quarters.

Secondly, it was the public sector dragging the chain, with no growth in its spending and a decline in investment as a number of major infrastructure projects were either completed or put on hold.

This should be a relief to those economists who have worried about public spending “crowding out” the private sector, which now appears to have more room to step up.

Thirdly, the drop in activity didn’t mean a drop in incomes, with business profits up as well as wages, and even rents, all growing faster than inflation.

Saving grace

So, if incomes are growing across the board but economic activity is stagnating, where’s all the extra cash going?

Into the bank.

From historical peaks above 20 per cent during COVID, when stimulus payments collided with a physical inability to get out and spend the dough, the household savings rate plummeted to a low of just 1.5 per cent in September 2023.

That was the lowest since December 2007, as households chewed into their savings to cope with high interest rates and a surging cost of living.

But the savings rate has rebounded from that low. In the March quarter it rose to 5.2 per cent, which is roughly back where it was immediately before COVID.

This is a fourth reason why the economic slowdown in the March quarter isn’t as bad as it seems.

Now that savings are back around more normal levels, it becomes increasingly likely that future income growth (such as from yesterday’s minimum and award wage decision) will be channelled into household consumption.

And there’s a very simple way to make this happen.

Enter the RBA

The publication this week of the RBA’s May meeting minutes reconfirmed that the board had seriously contemplated a 0.5 percentage point cut, before opting for 0.25.

However, at least at the start of this week, most Australian economists had been anticipating that the Reserve Bank would wait until August before making another cut.

But financial market traders strongly disagree, particularly after reading those minutes and seeing today’s GDP numbers.

They are now pricing in a greater than 80 per cent chance that the RBA will cut interest rates again in July with about a 70 per cent chance of a follow up cut in August.

Markets predict the cash rate will be at or below 3.1 per cent by the end of the year, down 75 basis points (or three standard rate cuts) from its current level of 3.85 per cent.

That’s not surprising, given that the RBA most recently predicted annual economic growth of 1.8 per cent in the year to June — a forecast that now requires a very unlikely 0.7 per cent leap in growth this quarter to achieve.

With inflation seemingly tamed, at least for now, excuses are running out for the Reserve Bank not to lower interest rates more quickly.

The rising savings rate, weak household consumption and modest growth in private investment all reinforce the idea that the cash rate is “restrictive” — that is that it is still holding back the economy.

What better way to encourage households and businesses to spend more on consumption and investment, and save less, than by cutting interest rates? 

Risks to the downside

The odds of the RBA cutting rates sooner rather than later are also boosted by the dour global economic outlook, clouded by Donald Trump’s tariff policies and generally erratic policymaking.

The OECD released its latest Global Economic Outlook report overnight, and cut its global growth forecast for this year from 3.1 to 2.9 per cent, with no improvement expected next year.

“Today’s policy uncertainty is weakening trade and investment, diminishing consumer and business confidence and curbing growth prospects,” the organisation’s secretary-general, and former Australian finance minister, Mathias Cormann said.

Indeed’s Asia-Pacific economist Callam Pickering warned we are far from immune.

Treasurer Jim Chalmers said that “the Australian economy remains one of the strongest in the world” but, at the moment, that’s little to write home about.

And, as Pickering pointed out, Australian productivity has been unchanged over the past two quarters and remains more than 5 per cent below its peak.

Meanwhile, the lingering affects of previous inflation and real wage declines are likely to take at least until the end of this decade to repair, even if nothing goes wrong in the meantime.

While the re-elected government is talking up its reform agenda to try and kick-start the private sector, Pickering argued the RBA must also play its part.

“The RBA will need to cut rates at least another couple of times this year to provide sufficient support to households and businesses, while ensuring that the unemployment rate remains low and we avoid recession.”

Having avoided falling off what successive RBA governors have described as “the narrow path” of reducing inflation without spiking unemployment, it would be ironic if the bank was too slow to recognise the latest bend in the economy and blithely walked right over the edge.