Q+A: Is Australia already sliding into an economic downturn?
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What is the main topic discussed in this episode?
Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Sean Aylmer.
What recent economic trends indicate a downturn in Australia?
Australia's economy slowed sharply in the March quarter with growth driven almost entirely by a surge in data centre investment, while consumers pulled back discretionary spending. and productivity went backwards. While the annual figure came in at 2.5%, the combined impact of higher interest rates, the Middle East conflict and a weakening housing market could drag growth even lower from here. Paul Bloxham is Chief Economist, Australian, New Zealand and Global Markets at HSBC. He used to work at the Reserve Bank. Paul, welcome to Fear and Greed Q&A. Great to be here. Appreciate that the economic growth figures for the March quarter are backward looking, but what can you take from them?
Well, they are quite backward looking. And I think particularly for the reasons you described already, which is that the Australian economy has faced a range of shocks since then, really. The three interest rate rises we've seen from the RBA, only one of which really would have shown up in those numbers at all. Of course, the Middle East conflict shock, which didn't start until the 28th of February. And I think also we can think about the budget as having quite a large effect on things. And that's, of course, a lot more recent. So I think, you know, these are historical numbers, really, in principle, they predate all those big sort of shocks that are hitting the Australian economy. And to the extent that they gave us an indication of where we were at to start with, well, they were a bit weaker than expected.
So the consumer was still spending, growth was still holding up okay in consumption. But I think there's some worrying features there where household disposable incomes are already falling in real terms. So we're already seeing them fall. Disposable incomes are not keeping pace with inflation, even in these numbers. And that challenge is going to continue and probably continue to weigh on growth over the next couple of quarters. I think another feature that was somewhat concerning is, as you say, productivity growth was really quite poor. I mean, in the quarter it fell significantly. GDP per hour worked. But over the year, we're still running at this very, very sluggish 0.3% growth year on year, which is about the sort of weak pace of productivity growth that we've seen on average over the past decade.
No signs there that productivity is really improving. So the economy is slowing down. Productivity is not improving. And this is all before. we see and face the big impact of the shocks that are still coming through. And look, our take is the sharp fall you've seen since then in business confidence, consumer confidence. You've seen employment fall in April and the unemployment rate jumped to a four-year high in April. You've seen household spending fall in April. And then more recently, you've seen house prices decline and auction clearance rates coming down. I think that collection of information tells you that things are going to weaken more in the coming period. And our own Headline view, we've had this view now for a couple of months because since these shocks arrived, we took sort of a view that it was going to actually be a big deal.
Our view is that GDP will probably contract in the second quarter, that we'll actually see an outright contraction. The economy's already in a downturn because of those shocks that are playing through.
Okay. Before we get to this quarter and then the next quarter and interest rates, before we get there, a couple of months ago, all the talk was that the economy was actually stronger than we thought it was going to be, and we talked about the Reserve Bank. It surprised everyone late last year in terms of its view on the economy being stronger.
How have rising interest rates affected consumer spending?
There were certainly signs that the economy was stronger, but these numbers actually show that that might have been a bit of a false dawn, or am I overstating it? Sure.
I think that the economy was stronger than was expected in the second half of last year, in the second half of 2025.
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