Barring some invisible force of growth, the economy probably shuddered in the first three months of the year. ANZ Bank, based on the partial information to hand, thinks the economy may have expanded by just 0.1 per cent - a sharp decelleration from the 1.1 per cent growth of the previous quarter. That raises the real risk that the economy shrank for the second time in nine months.

Annual growth has sharply slowed to 1.5 per cent from the 2.4 per cent recorded last year, ANZ predicted this week.

Most worrying for the government is that such a slump would cast serious doubt over the Treasurer's budget, not yet three weeks old, which anticipates GDP growth accelerating back towards 3 per cent in just over 12 months.

There are many reasons why growth will struggle to hit that kind of pace, let alone stay there, as the government so badly requires for its surplus forecasts to be met, without hard budget decisions being made.

But more importantly in the short term the headlines of a sharp slump in growth will invariably trigger fresh appeals from some quarters for more Reserve Bank of Australia interest rate cuts.

The central bank will do well to resist those calls.

Vulnerable economy


But the mere fact that some smart people think cutting the cash rate below 1.5 per cent is the right answer is a telling sign of how vulnerable the economy is in this post-GFC era of rocketing asset prices and expanding debt.

Even the slightest moment of realisation that prices of assets such as property, underpinned by record leverage, can tumble has brought into the open those who believe a quick interest rate cut will solve the problem.

Better check those figures again. Treasurer Scott Morrison, right, is relying on what now look like optimistic projections on growth. Andrew Meares

Indeed among officials within the Reserve Bank of Australia - as governor Philip Lowe has pointed out in recent months - there are still voices arguing for a lower cash rate, mainly as a mechanism to give debt-burdened households a chance to fix their "balance sheets" in an era of ultra-low wages growth.

With core inflation still well below the Reserve Bank's 2-3 per cent target range, and unlikely to threaten a return above that level for a long time, there is certainly prima facie scope to move. But it's misguided scope.

Cutting to let households nibble away at the colossal debts they've accrued in a relatively short period of time may be one thing.

But financial market analysts are quick to point out that there will almost certainly be troubling consequences if the cash rate does fall below 1 per cent.


For one thing, foreign investors who are funding the nation's large current account deficit may no longer feel they're being adequately compensated for the currency risk associated with lending in Australian dollars.

Don't forget this is happening just as the Federal government embarks on a fresh borrowing binge to cover the never-ending deficit and its desire for new infrastructure spending.

The US Fed is in a tightening cycle - narrowing the difference between US and Australian bond yields - making for a fraught test of Australia's status as a preferred destination for foreign savings.

"The RBA should hike to attract much-needed offshore capital," says TD Securities economist Annette Beacher, who argues the case for a higher cash rate is not about curbing inflation.

Customers dry up. Huge household debt, the threat of rising taxes and job uncertainty are taking their toll on domestic spending. Supplied

Rather it's about limiting the risks of a housing blowout, she says, and ensuring Australia and its debt-hungry government stays well funded at favourable from offshore capital.

"Funding the current account isn't the issue (it's less than 1 per cent of GDP at the moment) but funding our fiscal deficit folly is the problem," she warns.

A nasty predicament


Ever loser monetary policy stimulus will deepen the nasty predicament the Reserve Bank has found itself facing since 2014, when it first realised it would have to support regulatory intervention to "lean against" surging house prices as it cut the cash rate towards unprecedented lows.

The 300 basis points of interest rate cuts between late 2011 and August of last year were primarily motivated by the need to bring the dollar down in a world awash with global central bank liquidity. But it also sent the housing market roaring.

Contemplating yet another round of cuts - which would send the cash rate dangerously close to the dreaded "lower bound" - means dealing with the risk that it adds yet more fuel to the Sydney and Melbourne property markets, reversing recent signs of a nascent moderation.

Amid the current constellation of challenges, advocates of more monetary policy stimulus are by definition supporters of even greater regulatory activism.

The Australian Prudential Regulation Authority, which has been leaning heavily on banks to curb loans to investors and stem the number of borrowers taking out interest-only mortgages, will be forced to deal with the consequences of a Reserve Bank adding fresh stimulus.

How might that look in practice? A complete ban on new loans altogether?

Even now, the Reserve Bank is unhappy that credit growth is galloping along at 6 per cent a year, with wages barely managing to grow at 2 per cent.

Keep that up for long enough and the downside of big leverage can come back to haunt you. Fast.


Household debt weighs heavily

Already there is a more than a hint that the run up in household debt of the past few years is starting to weigh on the "animal spirits" of consumers.

Sentiment appears to be shifting; from the fall in Sydney and Melbourne auction clearance rates; to a sudden up-tick in car buyers' preference for second-hand vehicles.

JCP, a prominent hedge fund and one of just three outside equity managers for the Future Fund, warned this week that interest-only loans maybe Australia's "subprime" because they threaten to trigger a consumer strike when households wake up to the fact that wages growth won't be enough to shoulder the debt load.

Westpac's monthly survey of sentiment reports consumers are feeling far less buoyant about the trajectory of their finances over the next 12 months.

Much of that is showing up in recent downgrades across the retail sector, which is awash with big name chains such as Topshop and Topman thrown into receivership.

The hit seems not just driven by slower spending on traditional retail goods, but because it's happening at a time when competition from abroad is crunching margins.

Structural changes in retail - such as the "Aldification" of supermarket competition, a disinflationary force - only adds to the complexity confronting Reserve Bank policymakers as they field renewed talk of more rate cuts.


Morgan Stanley economists led by Tim Nicol on Friday pointed to the raft of negative forces hitting consumers, and raised the idea that Australia's economy is "desynchronizing" from the current rebound in global growth.

"The reality is that the consumer has found a resistance point," they say.

"Bank repricing of interest rates and an expectation from consumers for more, now links up with higher essentials inflation, a bigger taxing budget and slowing conditions in the two key employment sectors of housing and retail.

"Wage growth remains absent, and underemployment high."

And all of this is well before anyone really panics, which is the Reserve Bank's worst scenario.

Households have been able to maintain living standards in the face of collapsing wages growth by dipping into savings built up after the financial crisis.

That has in no small part worked to keep the economy out of the recession many feared it would succumb to after the China-driven resources investment boom crested in 2012.

But burning through savings can't last forever.


Overlay that with the psychological factor. Surging asset prices have delivered a huge sense of wellbeing among those holding the stocks, bonds and properties that have climbed in value.

That "wealth effect" has been a powerful supercharger of consumption on the way up.

It's folly to imagine it will only ever go up.

It's double-folly to imagine than when it swings into reverse the effects it won't be just as powerful on the way down.