Economy flatlining, savings dwindling, but help is on its way, says Chalmers

Treasurer Jim Chalmers says high interest rates are largely to blame for the worst economic growth in decades outside the pandemic as Reserve Bank governor Michele Bullock warns that interest rates would remain high as long as needed to bring down inflation.

Over the first three months of the year, the Australian economy grew by just 0.1 per cent, taking annual economic growth to 1.1 per cent. It’s the slowest rate of annual growth since December 2020 and the worst rate of growth since the recession in the early 1990s excluding the pandemic.

The economy has flatlined, but Treasury and the Reserve Bank believe Australia will avoid a recession, forecasting economic growth to pick up in the second half of the year.

Chalmers said any growth was welcomed in the current circumstances, and while the first half of the year has been tough for households, income tax cuts and energy bill rebates from July 1 will soon start to ease some of the pressure.

“These three months of weak growth at the start of the year are primarily a story about higher interest rates combined with some of those other pressures as well,” he said.

Shadow treasurer Angus Taylor said the economic pressure was of the government’s own making.

“On any measure, Labor isn’t delivering strong economic management. The only thing keeping Australians’ heads above water in this cost-of-living crisis are their jobs,” he said.

“Labor has delivered three failed budgets that have added to inflation, and left households and small businesses struggling to make ends meet.”

The economy managed to grow slightly due to increases in government and household spending, but that household spending (up by 0.4 per cent over the March quarter) was driven by spending on essentials, including food and rent.

Many households have juggled the rising cost of essentials and higher interest rates by eating into their savings, with the savings to income ratio dropping from 1.6 per cent in the December quarter to 0.9 per cent over the first three months of the year.

Westpac senior economist Matthew Hassan said that implied households had eaten significantly into the extra savings built up during the pandemic.

“About 45 per cent of the estimated $255 billion reserve now looks to have been spent,” he said.

“Household spending has been more resilient than previously estimated, but now households have smaller buffers to support spending going forward.”

RBA governor Michele Bullock says she won’t lower interest rates until inflation comes down.Credit: Alex Ellinghausen

Inflation has fallen from its near 8 per cent peak in December 2022 to 3.6 per cent, as the Reserve Bank lifted interest rates in its efforts to take heat out of the economy by reducing spending. The last interest rates rise in November took the official cash rate to a 12-year high of 4.35 per cent.

The RBA governor said at a Senate estimates hearing on Wednesday morning that she understood high interest rates hurt some households more than others, but she emphasised that getting inflation down was the most important thing the central bank could do for the economy and all households.

“The best thing I can do for everyone, including all the young people who have been hurt by this, is to get inflation down,” Bullock said.

The Reserve Bank wants to get inflation back to its target range of 2-3 per cent, a point at which it won’t materially affect households and businesses, and it expects inflation to reach the top of that band by the end of next year.

Asked when the bank would start bringing interest rates down, Bullock said the board would begin lowering interest rates when there were clear signs inflation was coming into the bank’s target range.

“It’ll be provided when the board is convinced that inflation is coming back down to within target. That’s when the relief from interest rates will come,” she said.

Chalmers said things were tough at present for Australian households, and the government was acting to help.

“We know if you’ve got a mortgage you’ve been hit by higher interest rates. We know if you’re a young person, the rental market can be especially tough,” he said.

“That’s why I’d say to everyone who’s under pressure, the start of next month, every Australian taxpayer will get a tax cut. Every Australian household will get energy bill relief. There’s an increase in the minimum wage. There’s help with the costs of medicine. There’s help with rent assistance.

Credit: Matt Golding

“There are a whole range of measures coming in over the course of the next few months, which are designed to not just recognise but act on and respond to the legitimate pressures that people are under right now.”

Moody’s Analytics economist Harry Murphy Cruise said households were struggling to save at the moment.

“The government and Reserve Bank of Australia are hoping families put those savings away for a rainy day, rather than spend it through the economy. But with families under so much pressure, it’s likely a large chunk of those dollars will be spent,” he said.

“We don’t expect that extra spending will be enough to spur a resurgence in inflation, but it risks being a handbrake on its progress through this year and next.”

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