Chief economist update: The Budget surplus can wait

"Anything that could go wrong will go wrong." - Murphy's law.

It seems like it for us, Australians all. The latest (although dated) GDP growth figures showed that domestic economic growth slowed to its slowest pace in a decade (in the midst of the Global Financial Crisis) to 1.8% in the March quarter from 2.4% in the year to the December 2018 quarter.

This gave credence to the Reserve Bank of Australia's (RBA) decision to cut interest rates to a record low of 1.25% just a day before the Australian National Accounts were released.

While the RBA's rate reduction would certainly help, note that the RBA monetary policy transmission mechanism takes around 12-18 months before it flows through into general economic activity.

Suddenly, gloom and doomers are crawling out of the woodworks - my next-door neighbour would be pleased at being proved correct for he has been telling me Australia is heading for a recession ... every year, for 10 years.

A report by the ABC shows AMP chief economist Shane Oliver backs him up: "So we see a higher risk of an Australian recession in 2020 -- risk of around 25% from 15% before."

Not only that, the ABC also wrote shadow Treasurer Jim Chalmers said the nation was already in a recession of sorts. "Australia finds itself still in a per capita recession, this is the third consecutive quarter that we have had that measure go backwards and that's the first time this has happened since the recession of the early 1980s," the ABC said.

As Chalmers is expected to do.

But beyond politicking, tariff wars, the World Bank's recent downgrade to its global GDP growth forecasts - 2.6% in 2019 (down 0.3 pps from its January predictions) and 2.7% in 2020 (down 0.1 pps) - the details of the March quarter Australian National Accounts are indeed worrying.

Government consumption contribution halved to 0.2 pps to growth in the March 2019 quarter from 0.4 pps in the December 2018 quarter while public investment contributed nothing to growth in both quarters. There goes the RBA's "central scenario ... for the Australian economy to grow by around 23/4 per cent in 2019 and 2020 ... supported by increased investment in infrastructure".

Exports contributed another 0.2 pps to the March 2019 quarterly growth rate of 0.4% - a function of the lagged effects of the AUD's depreciation that makes Australian exports cheaper and imports dearer.

However, the slowing global economy and increased speculations that the Fed will be cutting interest rates have nullified the recent RBA rate cut - sending the AUD's higher against the greenback and on the trade weighted index, which if it becomes persistent would turn Australian export's positive contribution to negative.

More worrying, household consumption's contribution to growth has halved from an already low 0.2% in the December 2018 quarter to 0.1% in the March 2019 quarter. Not only has household spending slowed, households are also topping up their savings - the household savings ratio rose to 2.8% in the March quarter from 2.6% in the previous three-month period.

It's too early to tell whether or not the Federal Government's tax giveback (from July 1) will be spent or saved.

But with mounting concerns over the Australian economy, households would rather spend the extra money - from the tax stimulus and the RBA rate cut - to shore up savings instead.

Spending can wait! Consumer prices aren't rising fast enough anyway.

Lesser household spending - which accounts for around 60% of the economy - will increase the risk of slower growth/recession.

Suddenly, that hoped-for Budget surplus coming in FY 2019/20 is in doubt.

The government should increase spending now instead of waiting for a rainy day.

Read more: ABCAustralian National AccountsJim ChalmersReserve Bank of AustraliaShane OliverWorld Bank
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