Sluggish Growth and the Looming Risk of Recession: Unraveling Australia's Economic Landscape

What is happening to growth?

So, if everything eventually boils down to economic growth, what is happening there?

The easy answer is that the Australian economy has been slowing since 2Q22. Back then, growth surged as the economy reopened, so it was a somewhat artificial surge that was never likely to last, and indeed it hasn’t. But the successively lower quarter-on-quarter growth rates that have followed have now taken growth down to just 0.2% QoQ, and year-on-year measures only still look reasonable due to a very weak base of comparison in 2022.

 

Not only that, but the composition of growth has seen household consumption slowing steadily, with few other elements of GDP providing much offset or promise of stronger growth in the coming quarters. Again, this isn’t hugely surprising given the amount of tightening the RBA has implemented, and the impact this is having on household debt service costs, while savings rates have also fallen sharply, making it harder for households to smooth their consumption by dipping further into savings.

One source of possible upside growth is related to China’s reopening. Though so far, this has been extremely unimpressive, with a services-led upturn having few implications for Australia’s extraction industry or manufacturing, though potentially, agricultural exports may benefit from a thawing of political tensions.

 

 

Growth looks quite likely to stay subdued at these sorts of growth rates in the coming quarters, and if so, will result in a full-year GDP growth rate of only 1.7%. Even that flatters what will be closer to a 1% annualised rate of growth on a sequential basis. And we’d characterise the risks to our forecast as being on the downside. This should help to pull inflation lower. But it may keep Australia just the right side of a recession.

 

Prospects for Australian inflation to keep falling

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