McCrann: GDP time bombs threaten to put RBA in impossible position

RBA governor Michele Bullock. Picture: NCA NewsWire / Martin Ollman

There were two explosive time bombs ticking away in the detail of the – already, just dreadful – GDP numbers from the ABS.

They threaten to put the Reserve Bank in an impossible position.

Demanding that the RBA slash interest rates as the economy plunges into recession, with the jobless rate rocketing towards and most likely above 5 per cent.

Demanding also, though, that the RBA hike rates – or at least, not cut them – as inflation stays stuck above the top of the RBA’s 2-3 per cent inflation target, or indeed threatens to go higher above 4 per cent.

The prospects of the ‘Goldilocks mix’ that RBA governor Michele Bullock has been desperately hoping for – inflation heading down to 3 per cent and then sustainably to the 2.5 per cent target midpoint, with the jobless rate hopefully only edging up to around 4.5 per cent – are fading fast.

The two time bombs are the continued – and anything but surprising – abysmal productivity, and near double-digit leaps in the total cost of compensating workers. That’s ‘wages-plus’.

As Bullock has said repeatedly, generalised wage rises of even 4 per cent - far less higher, like the 6 per cent dished out to the CFMEU in construction and the DP World wharfies – are utterly incompatible with her task of getting inflation back to around 2.5 per cent, unless we get a big lift in productivity.

She/we need sustained productivity growth around 1.5 per cent a year.

So what did we get over 2023?

Not even zero productivity, but negative productivity. That’s to say, by the end of 2023 we were getting less output per worker-hour worked. Over the year productivity fell 0.4 per cent, according to the ABS.

That effectively kicked us off 2024, with extreme pressure on businesses to raise their prices by more than their increased wages costs. Or start sacking.

That’s a pretty unattractive choice: either the inflation rate or the jobless rate, and quite possibly both, going up.

Leading to equally unattractive choices for the RBA, depending how it plays out over coming weeks.

It also, by the bye, places a huge question mark over the now 6-week gap between RBA policy meetings – with the next meeting Tuesday week rather than last Tuesday under the old, and with no meeting at all in April.

Is this now too big a gap? Both for the RBA to respond promptly to rapidly changing economic circumstances; and then to maintain continuing policy change, like it did month-to-month through the GFC?

And most particularly right now, when we are clearly heading straight into a very febrile fast-

changing economy?

The other time bomb was the surge in COE – Compensation of Employees – running at over 8 per cent for the private sector and an extraordinary 9.1 per cent for public servants, the highest for them since 2011 according to the ABS.

The explosive potential is, first, fiscal – threatening to force governments to raise taxes, or cut jobs and services, or both.

But secondly, in the absence of productivity gains, it will force businesses to raise prices or sack workers.

Whatever which way, none of this bodes well.