The RBA and its critics say Australia’s economy should be slowing. But the data shows that both are wrong Greg Jericho

RNow, a key debate between the RBI and the government is on how hot the economy is running. The RBA says there is „excessive demand”, while the Treasurer argues the economy doesn’t need to slow further. The data clearly shows that the treasurer was right.

This week the Deputy Governor of the Reserve Bank announced that the RBA was feeling the heat. A speech by Andrew Houser to the Economic Association of Australia on „Beware of False Prophets” A little less subtle than „stop picking on us,” but that was basically the gist.

The speech was a response to criticism after the RBA’s most recent decision to keep rates steady, along with updated estimates of core inflation above 3% until the end of 2025. Some commentators The RBA suggested giving up And „its credibility is shot” because to reduce inflation, at least 100,000 Australians are likely to lose their jobs and have to raise rates further to trigger a recession.

Both the RBA and its critics agree that the economy actually has more „demand” – higher spending, wage growth and investment causing prices to rise. They disagreed on what to do.

However, here Treasurer Jim Chalmers joined the debate by arguing that there really isn’t much demand in the economy.

I (and the data) are very much on the side of the treasurer.

In her press conference last week, Michele Bullock argued, „What we’re dealing with is continued strong demand, particularly for services. We’re using the tool we have — monetary policy — to act on the demand side of the economy.

You can understand why she worries about labor-intensive services. The Governor will recall what happened during the mining boom when prices actually rose above demand:

Click here if the map is not showing

At the end of 2007, the amount of services households purchased was 5.6% higher than expected before the boom began.

In such circumstances, you can understand the RBA raising interest rates, which reduces the ability of households to spend money on services and non-discretionary goods (ie things you can do without).

Click here if the map is not showing

In essence the RBA is arguing that what is happening now is exactly what happened during the mining boom, and it should respond in the same way – higher rates.

Except … the picture is completely different.

The volume of services we buy in bulk is below the pre-pandemic trend, and although it has recovered, it is only growing in line with that trend. The decade before the pandemic was a period of low interest rates as the RBA tried to stimulate the economy!

Click here if the map is not showing

This also applies to non-optional items. After the lockdown there was some recovery in 2022-23. But the volume of services we buy has not grown at all in the last year and a half.

Click here if the map is not showing

Remember, this argument is really about pay. If Australia is flooded with excess demand, wage growth will rise.

But it isn’t.

This week is the latest Wage Price Index Statistics In the June quarter, annual wage growth was steady at 4.1% and wages rose just 0.8% in the June quarter.

Remember that inflation rose 1% in the June quarter.

It takes mental gymnastics and a flaw in logic to argue that wages rising more slowly than inflation cause inflation.

The situation is even worse when we compare wage growth to the 1.3% rise in the cost of living for working families, which also takes into account increases in mortgage repayments (which are not included in the CPI figures):

Click here if the map is not showing

Yes, 4.1% annual wage growth outpaces 3.8% annual inflation, but real wages have risen just 0.23% over the past year.

Click here if the map is not showing

Show where excess demand is located on this graph. I will wait.

Still waiting…

Why am I waiting? This is because there is no increased demand seen through wage increases!

Why should the RBA raise rates again? What exactly does it reduce?

And it’s not just the wage-price index. The latest fortnightly figures for enterprise negotiated contracts show that we are about nine months past the peak:

Click here if the map is not showing

Maybe we have a lot of other non-wage income?

Real income per capita gives a good sense of how we fare on this score.

Again, during the mining boom, household incomes rose rapidly in real terms (and so did our spending on services and non-discretionary goods), but now we’re looking at the opposite – a total collapse:

Click here if the map is not showing

So real wages are barely growing, household incomes are falling, and household spending is flat. You’d think an economy that’s „running a little hot” would actually show some signs of heating up.

But what about businesses? If the economy is saturated with excess demand, you can expect non-mining business investment to grow solidly.

During the mining boom, non-mining investment grew by about 10% each year. After the pandemic, there was a natural recovery to compensate for the lockdowns. But in the most recent figures, annual growth in non-mining investment was just 3.6%. A rare sign of a hot economy:

Click here if the map is not showing

The RBA and its recession-loving critics may think the economy needs to be slowed and the argument is about how much to slow. But a look at the data makes it abundantly clear that Chalmers is correct in arguing that the economy is already slow enough.