Australia posted its weakest economic growth – excluding the Covid-era distortions – since 1992 in the first quarter of 2024, we learned this week.
Inflation, too, has ticked up lately rather than remaining on a downward trajectory towards the Reserve Bank’s 2-3% target range.
Should inflation remain resistant to further falls, the bank’s governor, Michele Bullock, has said the RBA won’t hesitate to hike interest rates again – knocking more wind out of the economy.
So is there a risk Australia’s economy could become stuck in a rut with high inflation and unemployment and no growth – a form of “stagflation”?
Here, Peter Hannam first lays out the case against that grim conclusion before Jonathan Barrett argues the economy is facing both stagnation and inflation.
We’re not livin’ in the 70s, thank goodness
Hannam: Stagflation, like the great depression or the global financial crisis, is a term used by economic historians for a specific era.
It refers to the 1970s and early 1980s when developed economies were dogged by high inflation and unemployment. GDP growth slowed markedly compared with the post-second world war boom.
Skyhooks may have sung Living in the 70s but, save for the bit about “eatin’ fake food under plastic trees”, that period is a foreign land as far as today’s Australia goes.
For one thing, Australia – and other major economies – have independent central banks now precisely to guard against a return to entrenched high inflation. Quarterly headline inflation in Australia peaked at 7.8% at the end of 2022 – well shy of the 17.7% spike in 1975 – and is on a bumpy but downward track.
The jobless rate averaged 1.9% in the three decades or so to 1974. It soared to an average 7.6% in the 2o years afterwards, including over 10% in 1983.
Compare that mix with our March quarter inflation of 3.6% and Treasury forecasting it may drop below 3% by the end of 2024. (The RBA’s own predictions, made pre-budget, aren’t so optimistic with a sub-3% CPI not achieved until late 2025.)
Annual GDP growth might be ticking along at a meagre 1.1% but the economy is likely near its nadir – subject to a surprise shock – and should accelerate by year’s end. The boom years might be over for most nations but an extended Australian stall looks unlikely.
Warren Hogan, Judo Bank’s chief economic adviser who thinks the RBA will need to hike interest rates again, says our economy has little spare capacity.
Inflation will probably be wrung out of the system over the next year or so, and economic growth will be buoyed as artificial intelligence helps boost productivity, he says.
The unemployment rate has been at or below 4% for most of the past two years – a level that would have been the envy of federal treasurers over the previous five decades.
“This is not stagflation as we know it,” Hogan says.
Jonathan Kearns, a former senior RBA executive now at Challenger group who also wonders if monetary policy needs to be tightened further, says the labour market is “functioning remarkably well” given the economy is barely expanding.
“We’re not going to see a substantial pickup in the unemployment rate,” Kearns says.
Job vacancy numbers, due to be updated later this month, are turning lower but remain about 50% higher than pre-pandemic levels.
Kearns says there’s no doubt “people are thinking about” stagflation. High inflation directly contributed to low GDP growth in the 1970s by disrupting companies’ efficient allocation of resources, but “it’s hard to argue” the current surge in prices in the 3-4% range is serving as a drag now.
Twin Opec oil strikes contributed supply shocks in the 1970s – not entirely unlike the Covid chaos or even the scramble to wean off Russian energy imports after Moscow’s invasion of Ukraine. But most of those inflation pulses have been absorbed.
Could a major disruption, such as a Chinese attack on Taiwan or a further heating up of the cold US-China trade war, tip Australia into recession accompanied by soaring joblessness and reviled inflation as new supply chains need to be linked up in haste?
Yes, that might look a bit like stagflation. But at that point, collapsing real estate, stock and other asset markets – not to mention possible war mobilisation – might make the issue of stagnant growth and Bunnings being deprived of Chinese-made goods the least of our worries.
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Get out your bell bottom pants
Barrett: The well-known fable about a frog not noticing it is being boiled alive is appropriate. Australia is probably already in stagflation, it’s just largely gone unnoticed.
At a broad level, stagflation refers to persistent levels of inflation with moderate to poor economic growth, both of which are happening right now, as the recent tepid economic growth and consumer price data show.
Many households will know this to be intuitively true because they have been feeling these forces for some time. Businesses are collapsing at decade-high rates. If there is a missing ingredient, it is higher unemployment – but that probably lies ahead.
The bad news is that stagflation can be a long-term affliction, as it infamously was in the 1970s. That period was marked by global energy supply shocks, societal unrest and inwards-looking policymaking. Sound familiar?
Unfortunately, it’s time to get out the bell bottom pants – because even though history doesn’t repeat, it’s already rhyming.
We’re at the end of the first push to bring inflation under control, and we are seeing glimpses of a recession on the horizon.
Armed with a single policy lever, the central bank will either keep rates elevated to subdue sticky inflation, or lower rates to stimulate growth, representing the stagflation conundrum.
If it takes the expected path of using elevated rates, it will eventually bludgeon inflation down into its preferred band at significant expense to affected households, which are already losing their homes and scrimping on necessities. Unemployment will rise.
At that point, someone will call a press conference to declare the inflation fight has been won.
According to the stagflation script, policymakers will then stimulate a weak economy, and inflation will come roaring back, ushering in years marked by central bankers playing whack-a-mole with recessionary and inflationary pressures.
Part of the stagflation view is almost philosophical because proponents understand there are always serious societal disruptions stemming from major events, like wars and pandemics.
While there was a natural human desire to get back to the way it was after lockdowns, we instead got severe inflation, wrongfooting central bankers. Talk then turned to a heavenly soft-landing scenario; instead, the likely result will be years of economic purgatory.
I appreciate that, as a version of the old joke goes, economic predictions make weather forecasts look good. What happens next is not set in stone, and creative policymakers can make a difference.
On the bright side, Australia will probably fare better than many other advanced economies, as it did during the global financial crisis.
The US is gripped by a bitter political divide in which the major parties will lean towards populist measures, potentially exacerbating the problem.
Australia is not, however, immune from global forces, and the divide between big-spending and debt-free older cohorts and younger generations may get wider.
Older generations have enjoyed the good fortune of investing during a prolonged period of low rates that has lifted the value of their retirement portfolios. Younger generations may not be so lucky.