I always worry when I hear politicians or economists talk about how the economy needs to be administered some painful medicine. Inevitably it means people suffering for no good reason. Right now the medicine of interest rate rises is poisoning the economy as living standards collapse.
If ever there was an example of the disconnect between “the economy” and what people actually experience, it came with the release of the annual gross state product (GSP) figures, which measure state economies much like GDP measures Australia’s economy.
The news was announced by the Bureau of Statistics, which told us “gross state product rose in all states and territories”.
To be fair to the ABS, it was not spinning the numbers, just announcing the top line figure that every state and territory economy in 2023-24 was bigger than in 2022-23.
This is unsurprising. Unless something drastic occurs – such as a pandemic that shuts down the state – economies are supposed to get bigger each year.
The more pertinent fact was that each state economy grew more slowly in 2023-24 than it did in 2022-23: (I’ve excluded NT due to scale – you can see its graph here.)
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And, overwhelmingly, the growth was due to population growth.
Once you take out the increase in population, nearly every state went backwards:
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The biggest driver of economic growth across the economy last financial year was Queensland, even though its economy is only the third-biggest:
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The reason was Queensland exports – especially coal – grew substantially compared with 2022-23 due to fewer weather disruptions.
By contrast, WA had a shocker of a year because its exports were disrupted by weather. The ABS noted there “was less production of oil and gas due to weather disruptions”.
Who could have guessed climate change caused by oil and gas emissions would hurt the oil and gas sector?
But weather disruption or not, households were unlikely to be feeling any joy from the GSP growing in all eight states and territories, because average household disposable income – essentially living standards – fell in every state except Tasmania (NT and ACT graph is here).
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And this brings us to the pain that, apparently, is good for us.
The main reason why our living standards have fallen is because the Reserve Bank seems to have been trying with all its might to reduce them.
Interest repayments on dwellings have risen sharply in the past two years as a share of total household income:
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The RBA has increased interest rates in order to cut back our disposable income (because mortgage repayments, much like taxes, are things you can’t avoid paying, so they reduce the amount of your wages you have to spend).
So great has been the increase in interest rates and so great are the size of mortgages, that the past two years have seen both the biggest one-year increase in average mortgage repayments:
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It is then no surprise that average household disposable incomes have fallen so far that, rather than just undo the stimulus of the pandemic years, we’re now back around where we were in 2015:
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The RBA will be happy to see this – it is what it wanted.
It has been determined to reduce the amount of income we have to spend because it believes that our spending has created “excess demand”. It argues we are spending more than the economy can cope with and, as a result, inflation is going up.
And so the medicine of interest rates, the RBA argues, is for our own good – we need to stop spending so much so the economy will be back “in balance”.
Unfortunately for everyone, they got the diagnosis wrong, and the medicine they are inflicting is a poison.
In the decade prior to the pandemic the RBA cut rates in a desperate attempt to keep households spending. It was a decade of historically poor household spending, a decade where the recovery from the GFC was stunted by austerity measures of the Abbott-Hockey years.
By 2019 things were extremely dire, as even with rate cuts spending fell below the decade trend level.
Then the pandemic came, and the RBA cut rates again to keep things somewhat alive.
But since then, it has been all about the interest rate rises.
And sure, maybe as things opened up and we all went shopping again, you could understand the RBA being worried that we were all a bit too excited.
But even as our spending slowed, and then fell, the RBA kept administering the poison:
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Average household spending in the June quarter was about 3.5% less than would have been expected had we just continued on along the very weak 2010-2020 trend. And yet apparently it is not yet time to cut rates.
Apparently, we still are spending too much – it is not yet time to take away the poison.
Let us hope someone in the RBA is asking for a second opinion on its diagnosis.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
