The economic noise is getting louder, but right now the signal is clear

Economists spend eons working through spreadsheets of numbers trying to find patterns.

Amongst all that noise generated every day from statistics and figures, there should be signals – about the direction of the economy, about unemployment, about inflation, about the overall financial future of the country.

Reserve Bank governor Phil Lowe reckons the signal, the one that prompted this week’s increase in official interest rates to an 11-year high of 4.1 per cent, is absolutely clear.

“[There’s been] upside surprises on inflation, upside surprises on wages, upside surprises on housing prices, upside surprises on inflation overseas,” he told a gathering in Sydney on Wednesday.

“We felt like we couldn’t just sit idly and say this is all accidental and it is all just noise. The conclusion we reached was that this represents upside risk to the inflation outlook in Australia.”

Every day, there’s more economic noise that the RBA, Treasury and politicians have to consider.

Illustration by Matt Golding

A couple of hours later, there was a different (but just as clear) signal about the state of the economy.

The national accounts for the March quarter showed the economy expanded by a moribund 0.2 per cent.

It was worse than that. Once you take into account the country’s strong population growth, economic output per person fell by 0.2 per cent. Outside of COVID, that’s the largest drop in per capita GDP since December 2016.

Output per person is a pretty good economic signal. In 2018, when Lowe was arguing the next move in interest rates would be up to deal with expected higher inflation and wages because of an expected fall in unemployment, GDP per capita subsided.

Within six months, Lowe and the Reserve Bank were doing a monetary policy reverse ferret as it halved interest rates in a bid to drive down unemployment, lift wages and get inflation back within its inflation target band.

There were plenty of other signals in the national accounts. The household savings ratio fell to its lowest level in 15 years as people dug into their accumulated savings to deal with the cost of living.

AMP Capital economist Diana Mousina reckons at the rate people are using up their savings, the nation’s collective piggy banks will be empty by September – partly because of the higher interest rates put in place by the RBA.

The total amount of mortgage interest and fees paid by Australians reached $28 billion in the quarter (and that’s before rate rises in May and June). A year ago, they paid $16.4 billion.

Australians are now paying record amounts of tax (in part due to the wage rises that have the RBA concerned). In a year, individual tax payments soared by 14 per cent or more than $10 billion.

The national accounts suggest productivity growth is now running at its worst rate on record, falling by 4.6 per cent over the past 12 months.

But that annual number relies heavily on a 3 per cent drop that occurred in the June quarter last year. Originally reported as a fall of 1.9 per cent, it is now the second-largest quarterly collapse in productivity on record (only behind a blip in mid-1979).

Why did that happen? Hours worked slumped in the March quarter because of the floods that destroyed Lismore and inundated parts of Queensland. They rebounded the following quarter, but overall production was relatively flat.

That’s terrible for productivity growth, but it’s not an accurate measure of real productivity.

Every day, there’s more economic noise that the RBA, Treasury and politicians have to consider.

The signal, right now, is clear. Further interest rate rises, on top of a slowing economy filled with consumers who are running down their savings to make ends meet, mean people are reaching the end of their tether.

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