The economy is weakening. But it is a feature, not a bug

The Treasurer says it's not. "Barely growing" is how he described it.

The Reserve Bank governor looks to be in the opposite camp. Michele Bullock is said to be "on a knife's edge" on whether to raise rates again to cool off a hot economy.

Even the data seems to be giving mixed messages.

Last week's gross domestic product (GDP) figures said the economy was very weak. GDP growth for the last quarter was a paltry 0.1 per cent.

But we get the opposite message from data on prices, wages and unemployment.

Inflation is still above target, implying strong consumer spending.

Interest rates are still very high, implying strong demand for cash.

Nominal wages growth is high and unemployment is low, implying strong demand for workers.

Confused? Let's a take a step back.

We need to stop focusing on headline numbers and start looking at how those numbers are trending over time.

This paints a clearer picture of where the economy's going.

Yes, inflation is high, but it's declining over time. Inflation has halved in 12 months.

Yes, unemployment is low, but it's trending up over time. It's gone from 3.6 to 4.1 per cent in the last 12 months.

Yes, wages growth is high, but it has started to tick downwards. And while GDP is weak, this isn't new: it's been weakening for at least the last two years.

When we take this trend-view of the data, the conclusion is clearer: the economy is getting weaker.

The complication is this: a weak economy isn't an accident that necessarily needs fixing. The whole point of the Reserve Bank raising interest rates is to weaken the economy so inflation gets back under control.

The challenge for the Treasurer - and the Reserve Bank governor - is to make sure the economy is weak enough to cool inflation without killing the patient.

It's like a seesaw with high inflation on one end and a recession on the other. We want it to be finely balanced so we get neither.

Enter July 2024. This is when things will start to get interesting.

A lot of stimulus will start to come into the economy from July.

The stage three tax cuts will see an additional $24 billion injected into the economy. This is the equivalent of four interest rate cuts from the Reserve Bank in terms of household cash flow.

There's another $20 billion of new government spending in the budget that will flow into the economy, too, plus even more from state governments.

The Fair Work Commission decision to increase the minimum wage last week will see even more money pumped into households at a time when they are spending 90 cents of every dollar they earn.

All this stimulus is pushing the seesaw too far in the high inflation direction.

Don't take my word for it. Listen to the markets. The markets keep pushing back its prediction on when the Reserve Bank will start cutting rates and they've just done it again.

To make things even more complicated, all of this can change rapidly depending on what policymakers do at home and abroad.

At home, any more big spending will push the seesaw in the direction of high inflation, while any cuts to immigration will push it in the direction of recession.

Immigration has been the only thing standing between Australia and a recession for five consecutive quarters now.

Surprises overseas could similarly tip the seesaw in either direction.

If more countries cut interest rates, inflation will fall in Australia. The EU and Canada have been the first to do so. More could follow. This reduces inflation in Australia by strengthening the Australian dollar which reduces demand for our exports, pushing down prices.

The potential shock in the other direction is Trump.

Trump has promised massive new trade tariffs against China and, for the first time, sweeping tariffs against the rest of the world, too.

This means higher inflation in Australia. The logic is simple: tariffs are a tax on your own citizens. Introduce tariffs, and prices go up. If prices go up, the US Federal Reserve raises interest rates. This weakens the Australian dollar and increases demand for our exports which pushes up prices and thus inflation.

The summary is this: it sucks to be Jim Chalmers or Michele Bullock. The Australian economic seesaw is finely balanced between avoiding high inflation and avoiding a recession.

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Policy changes at home or abroad could quickly tip it in one direction or another. Most of our data is several months old by the time it comes out and we won't know what impact past decisions will have for months if not years.

What should they do in this environment?

The best advice is probably this: do nothing.

Fiscal policy should be neutral, delivering neither big surpluses nor deficits, and it would be unwise to change interest rates in a fog of uncertainty.

We are better off taking a neutral stance, waiting to see what happens and keeping our powder dry.

After all, the surprises of 2024 are just getting started.