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Australian Economy Hits Recession Level Growth

Australia’s economy is facing significant challenges, with GDP growing by just 0.1% in the March quarter, the weakest growth since late 2021. New data from the Australian Bureau of Statistics highlights this sluggish economic performance.

Katherine Keenan, head of national accounts at the ABS, noted that this period saw the lowest year-on-year growth since December 2020, with GDP per capita falling for the fifth consecutive quarter.

Treasurer Jim Chalmers attributed the weak growth to high interest rates but emphasised that Australia’s economy is still outperforming many other advanced nations. He pointed out that, despite global economic difficulties, Australia has achieved faster annual growth than countries like Canada, Italy, and the UK.

The economic strain on Australians is evident, with household savings dropping to an average of just 0.9% of income during the March quarter—the lowest since the Global Financial Crisis.

Reserve Bank Governor Michele Bullock expressed concerns over the weak economic figures, highlighting the delicate balance the Reserve Bank must maintain between avoiding a recession and controlling inflation. Finance expert Steve Mickenbacker noted that the current economic situation makes the Reserve Bank’s job even more challenging, potentially setting the economy on a path to recession.

Despite these challenges, upcoming tax cuts and minimum wage increases could provide some relief, although they may also contribute to inflationary pressures.

Australia’s Housing Crisis: Falling Behind International Peers

Key Points:

• Australia ranks 22nd out of 33 OECD countries in housing provision.
• Housing supply has increased slightly but remains behind international standards.
• Innovative use of existing housing stock and reducing investment property demand are essential measures.

Australia is struggling to keep up with other OECD countries in housing supply, ranking 22nd out of 33 nations. The recent federal budget highlighted that the undersupply is a significant factor in rising rents, mortgage payments, and house prices.

Although Australia’s housing supply grew from 403 to 420 dwellings per 1000 people between 2011 and 2022, it still falls short of the OECD average. Curtin University economics professor Rachel Ong ViforJ noted that Australia’s larger household sizes compared to countries like Italy need to be considered when evaluating housing supply.

Professor Ong ViforJ stressed the importance of building new homes to meet demand but also emphasized better utilisation of existing housing. This includes encouraging “empty nesters” to downsize and addressing the impact of short-term rentals like Airbnb on long-term rental availability.

Economist Saul Eslake pointed out that although Australia’s demographic profile is similar to Canada’s, Canada has managed to increase its housing supply more effectively. Comparing Australia’s housing strategies with those of other countries can help identify areas for improvement.

HSBC chief economist Paul Bloxham explained that Australians’ preference for larger, detached houses contributes to the lower number of dwellings per person. He suggested that constructing more apartment buildings could help alleviate the supply issue and make housing more affordable.

Eslake also noted that while young Australians still aspire to own large homes near city centres, they are more open to living in apartments. He recommended tax reforms, such as reducing stamp duty, to encourage retirees to downsize and make more established homes available for younger families.

RBA May Cut Rates in November

RBA Governor Michelle Bullock reiterated last month’s guidance on interest rates during ongoing testimony to Australia’s parliament this week.

Despite the rise in unemployment, Governor Bullock reported continued growth in the labour market. The RBA’s estimate for the non-accelerating inflation rate of unemployment (NAIRU) was slightly over 20 basis points above the current unemployment rate of 4.1%, though there is significant uncertainty around this calculation.

Challenges in the private sector might counterbalance the fiscal stimulus presented in the recent Budget. New energy rebates are expected to reduce headline inflation by approximately 50 basis points next year but will have minimal impact on underlying trimmed-mean inflation or consumer spending due to the small size of the subsidies. These rebates might also lower inflation expectations and indexed pricing.

The RBA prioritises quarterly data over monthly CPI data when discussing inflation. Governor Bullock mentioned that recent monthly data suggests slower-than-expected inflation, but the RBA will wait for quarterly statistics to further assess these developments. On the lags of monetary policy, the Governor noted that about 50 basis points of policy tightening might still be in the pipeline, considering the 18-month lag typically associated with monetary policy effects.

Additionally, it’s worth noting that:

• Energy rebates will be permanent unless there is significant gas market reform, and they will contribute to disinflation over time.
• Tax cuts are unlikely to be stimulatory due to the delayed effects of monetary tightening.
• Falling wages growth and immigration will eventually reduce service inflation.
• The increase in fiscal spending is mostly behind us.

Meanwhile, Goldman Sachs released a note suggesting that the threshold for further rate hikes remains high, and it expects the RBA to begin a modest easing cycle in November.

Missed Home Loan Repayments Spike

A recent survey by comparison site Finder has revealed a troubling trend among Australian homeowners. Out of 1,071 respondents, including 342 mortgage holders, 12% have missed one or more mortgage repayments in the past six months, equating to an estimated 396,000 borrowers falling behind.

Breakdown of Missed Payments:

• 4% of mortgage holders (132,000 households) missed one repayment.
• 8% of mortgage holders (264,000 households) missed more than one repayment.
• 3% have requested a repayment holiday or applied for hardship assistance from their lender.

Mortgage Defaults Growing:

Richard Whitten, home loans expert at Finder, expressed increasing concern over mortgage defaults, noting that many homeowners who managed to handle rate rises are now facing severe financial strain as their savings dwindle.

“Thousands of mortgage holders have weathered rate rises but are now experiencing extreme financial strain as savings and emergency funds run dry,” Whitten said. “Any further hikes would push many to breaking point.”

The survey also highlighted that 32% of borrowers are worried about missing a repayment due to mortgage stress, putting over 1 million Australians at risk of delinquency. Among those who missed payments, 33% cited running out of money due to other bills, while 31% pointed to increased interest rates making their mortgages unaffordable.

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