Rates, inflation and tax combination hitting economy hard

The Australian economy may have started to contract through the final three months of 2023 as a combination of high interest rates, cost-of-living pressures and growing tax payments took their toll on financially stretched consumers.

Data released on Monday by the Australian Bureau of Statistics revealed businesses running down their inventories rather than stocking up, in anticipation of soft demand from consumers just as wages growth eased.

The economy may have contracted in the December quarter, in part due to a sharp drop in business inventories.Credit: Joe Armao

The unexpectedly large 1.7 per cent drop in inventories will wipe a full percentage point from the December quarter national accounts result, to be released on Wednesday, which was already expected to be soft because of the struggles facing households.

Some economists now believe the quarter could show a small contraction, following on from the modest 0.2 per cent lift in economic output recorded in the September quarter.

Treasurer Jim Chalmers noted the Reserve Bank increased official interest rates to 4.35 per cent in the middle of the December quarter, adding to the fallout from global economic uncertainty and high inflation.

“Most people think that the December quarter was quite weak in our economy, I think that too, but it remains to be seen how weak,” he told Sky News on Monday.

The housing sector is another area struggling under the weight of high interest rates.

The bureau reported total building approvals fell by 1 per cent in January. In trend terms, the number of homes approved for construction was the lowest monthly result since early 2012 under the Gillard government.

In NSW, just 1515 houses were approved for construction, the lowest since mid-2012, with approvals down by 46 per cent since early 2021 when official interest rates were at 0.1 per cent and both state and federal governments were supporting home buyers.

In Victoria, there were 2370 houses given the green light which is the lowest since September 2013. Since their pandemic-era peak in March 2021, house approvals have fallen by 47 per cent.

Both NSW and Victoria experienced a recent fall in houses approved for construction.Credit: Dion Georgopolous

Housing Industry Association chief economist Tim Reardon said approvals have been falling since the Reserve Bank started lifting interest rates in mid-2022, with no sign there would be a turnaround soon.

“The low volume of building approvals throughout 2023 will see the volume of homes commencing construction continue to slow this year. The rise in the cash rate is the primary cause of this slowdown in approvals,” he said.

The bureau also reported that wages and salaries increased by 0.9 per cent in the quarter. This takes in both pay increases and changes in the size of the workforce, and took the annual rate of growth down to 8 per cent from 9.8 per cent.

Westpac senior economist Andrew Hanlan said the wage figures confirmed the financial struggles facing many Australians.

“Given the pressures from high inflation, higher interest rates and additional tax obligations, this points to a further decline in real household disposable income for households. Declining incomes continue to constrain consumers spending power,” he said.

While wage growth slowed, gross company profits jumped a sizeable 7.4 per cent in the quarter. It was driven largely by the mining sector with profits there up 17.3% or almost $10 billion.

The closely watched ANZ-Indeed measure of job ads, also released on Monday, is pointing towards a slowdown in the jobs market. Ads fell by 2.8 per cent in February.

Ads are down by 16.6 per cent since their peak in November 2022 but remain almost 38 per cent up on their pre-pandemic level.

ANZ economist Madeline Dunk said the figures suggested further sluggishness in the jobs market.

“The downward movement in job ads suggests there is scope for the unemployment rate to rise further, as do recent changes in labour market flows. That said, we think most of the near-term adjustment in the labour market will be via a fall in hours worked rather than employment,” she said.

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