[HSC] Economist: 2–15 September
The week in review.
The RBA left the cash rate on hold when they met on September 3rd and the release of the June national accounts saw Australia’s growth rate slip to its lowest level since the Global Financial Crisis.
1. Monetary Policy
The Reserve Bank decided to keep the cash rate on hold at 1.00% when they met at the beginning of September, which was the second successive month without change, following two cuts in June and July. Trade tensions between the United States and China have continued to escalate, increasing the likelihood of a global economic downturn. Over the past twelve months, exports from the United States to China have fallen by 20%, whilst trade in the opposite direction has contracted by 3%.
The successive rate cuts in June and July appear to already be having an impact upon the domestic economy, with an increasing in housing loan approvals putting upward pressure on property prices. However, household consumption levels remain weak, dampening the outlook for inflation, unemployment and economic growth. Consequently, the Reserve Bank viewed leaving the cash rate unchanged as the best course of action for raising wages and achieving their key economic objectives.
HSC Relevance
- The RBA kept the cash rate at the historical-low of 1.00% in September.
- A lower cash rate should support household consumption through a reduction in interest repayments, leading to an increase in aggregate demand and economic growth.
2. Economic Growth
The Australian economy expanded by 0.5% in the June quarter and by 1.4% across the past twelve months — the slowest growth rate since the Global Financial Crisis. Moreover, GDP per capita was steady across the quarter and has fallen by 0.2% since June last year.
Net exports contributed 0.6 percentage points to the quarterly growth, whilst government expenditure was also a major factor. Household consumption remains weak, growing by just 1.4% across the year. Households are also saving less, with the saving ratio falling from 3.0% in the March quarter to 2.3% in the most recent quarter. Household expenditure plays a decisive role in determining the level of economic activity in Australia, accounting for approximately 60% of total demand.
The ongoing trade war between the United States and China also contributed to the poor result. The dispute has caused widespread investor uncertainty, leading to an unwillingness to engage in long-term investment. This is particularly damaging for the Australian economy, where investment plays a larger role than other OECD countries. The negative effect that the dispute is having upon the domestic economy is expected to increase substantially over the next twelve months.
The poor result has led to renewed calls from RBA Governor Philip Lowe and other economists for greater infrastructure investment by the federal government. This will provide a boost to aggregate demand and encourage private sector investment through the crowding-in effect. However, the government appears unwilling to do anything that will damage its ability to achieve a budget surplus this financial year.
HSC Relevance
- Australia’s annual economic growth rate slipped to 1.4% — a figure not seen since the September quarter of 2009.
- The external sector and government consumption were key drivers of the growth.
- The two most significant concerns for Australia’s economic outlook are household consumption, which is being weighed down by weak wages growth and investment, which is being hampered by uncertainty surround the US-China trade war.
Further Reading
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Sunday at 6pm!
