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Recession signs: Economic growth has 'ground to a halt'

While the 0.1% increase in quarterly GDP was in line with experts' expectations, it still paints a dire picture for Australia's economic path.

Annual GDP growth has fallen to just 1.1%, the slowest rate of annual growth in GDP in more than three decades outside of the COVID-19 pandemic.

Commonwealth Bank (CBA) head of Australian economics Gareth Aird said the quarterly changes in real GDP paints the picture of an economy that "continues to slow significantly", saying economic growth has "ground to a halt".

"Indeed, the six-month annualised pace of GDP growth to the March quarter fell to 0.8%.  This compares with population growth of 2.4%/yr.  The upshot is that the economy has contracted a lot in per capita terms," Aird said.

"In colloquial terms the economic pie is still expanding modestly. But the average size of the slice of pie that each Australian has received over the past five quarters has progressively shrunk."

Aird noted that the slowdown in GDP growth was "by design, not default" as the economy was running hot coming out of the pandemic and operating above its capacity.

"But that picture has changed.  More specifically, we believe the positive output gap has now closed and a negative output gap will slowly emerge over the remainder of 2024 and into 2025," he said.

"The Reserve Bank of Australia's highly aggressive rate hiking cycle has clearly worked to slow demand growth in the economy.  Rising mortgage payments along with a lift in tax payable and the effects of elevated inflation have weighed on household purchasing power.  And the tailwind of pent-up savings on consumer spending has largely run its course."

Aird said data shows that Australians have been spending more than was previously expected, though he quipped that much of that spending has been occurring offshore saying, "we've done our best to export some of the inflation problem".

While there has been some increase in consumer spending, it has still gone backwards in per-capita terms, which he said could be signs of a recession, he added.

"Real consumer spend per person has fallen for five consecutive quarters.  Such an outcome would normally be associated with a large negative shock or recession.  The data explains why consumer sentiment has been stuck at recessionary type levels since mid-2022," Aird said.

What will the RBA do?

CBA expects the RBA will leave policy on hold at the June board meeting, and with no meeting in July that puts focus on the August meeting; just after the Q2 inflation data is released.

"At this stage our forecast for trimmed mean inflation in Q2 24 is 0.8-0.9%/qtr.  We believe such an outcome would be sufficient for the RBA to leave the cash rate on hold.  But a core print stronger than our forecast would test the RBA's resolve to not tighten policy further," Aird said.

"Given the challenging inflation backdrop the risk to our call is increasingly moving towards a later start date for an easing cycle."

Read more: CBACommonwealth BankGareth AirdReserve Bank of Australia