Source : Perth Now news
Australia’s economy is heading for the slowdown it had to have.
With the nation’s decades-long productivity growth malaise showing no sign of improving, Reserve Bank governor Michele Bullock admitted the harsh reality after the central bank’s monetary policy board held interest rates steady on Tuesday.
Inflation is still too high and the only way it will subside is if economic growth slows and households wear the cost.
“We are not forecasting that the economy is going to shrink this quarter,” Ms Bullock told reporters after the RBA’s first meeting of the year which did not result in a rate rise.
“We are forecasting that growth is going to slow, but growth has to slow.
“The key reason for that is that we have excess demand, and unless demand grows more slowly than the supply side of the economy for a time, we’re not going to get inflation down.”
Three interest rate hikes in 2026, the Middle East oil shock, and tax changes in the budget were taking their toll on the housing market and the broader economy.
That will help close that gap between demand and supply that is worrying Ms Bullock.
And it’s part of the reason the RBA board was comfortable enough to leave the cash rate on hold at 4.35 per cent while it waits to see how the Middle East conflict plays out, said NAB chief economist Sally Auld.
NAB expects the Reserve Bank to remain on hold for 2026 and begin to cut rates in 2027.
Capacity utilisation – a key measure influencing how price pressures are passed through the economy – was surprisingly not mentioned by Ms Bullock in her post-meeting press conference, Dr Auld said.
NAB’s monthly business survey registered one of the largest six month declines in capacity utilisation in the last 15 years, excluding the pandemic, which suggests the economy has weakened faster than anticipated, she said.
“We are maybe less concerned about the upside risk to inflation than we might have been even just a month or two ago,” Dr Auld told AAP.
While lower growth is good for the rate outlook, it’s still bad for households.
In August, the RBA revised down its medium-term productivity assumption to 0.7 per cent, which means the economy can’t grow much faster than two per cent per annum without pushing up inflation, Ms Bullock said.
As well as higher inflation, lower productivity means workers struggle to get real wage rises, she said.
Stagnant real wages means stagnant disposable income, which means stagnant living standards.
Treasurer Jim Chalmers acknowledged the threat that economic discontent would further push voters to populist parties such as One Nation.
“Obviously, when people are under pressure, they will express that in a range of ways, including in opinion polls,” he said.
“I think one of the defining anxieties in our economy is about this intergenerational challenge in housing.
“Now, it would have been easier but wrong for us to leave the tax arrangements for housing exactly as they are, and that would have locked out more and more generations from the Australian dream of owning your own home.”
