Tomorrow we get to see the latest quarterly inflation number. If it’s surprisingly lower than expected, then we might see a rate cut before Christmas. And given the surge in zombie companies and other seriously worrying indicators, a rate cut ahead of market forecasts might be what we need to avoid a recession.

Economics is an imprecise ‘science’ for guessing what an economy has done, is doing and what it might do. It’s a necessary evil to help central banks, governments and businesses to do what they’re supposed to do. Economics is also used by consumers and when borrowers lock in a three-year interest rate on a loan, they are using their economic knowledge to do so.

But as I said, economics isn’t like real science, where you can add two molecules of hydrogen (H) to one of oxygen (O) and you get water H₂O.

Reserve Bank Governors have misread the economy and made mistakes with interest rates for the numerous decades I’ve been writing about economics for public newspapers and websites. This isn’t because they’re knuckleheads. It’s because understanding exactly what’s going on in an economy is damn hard.

Dr Phil Lowe thought rates would be on hold until 2024. Glenn Stevens kept rates too high for too long when the GFC was brewing and was the first to cut worldwide in 2008. He later held them too high for too long in 2011-12 and had to cut aggressively again with the cash rate going from 4.75% in 2010 to 1.75% around the time he retired.

Then Treasurer Paul Keating and RBA boss Bernie Fraser oversaw a cash rate that pushed home loan rates to 17%. And in 1990 the RBA cut the cash rate by 5.5% in a year!

The cash rate went as high as 17.5% in January 1990. Do you wonder why we went into recession in that year? You shouldn’t!

The lags between tough policy rate rises and when the economy convulses big time, such that the RBA Governor says “whoops, I better cut”, can sometimes be longer than expected and confusing. It’s why smart economists at the RBA and elsewhere can misread the economy.

Given all this, the revelation in The Australian that “analysis from KPMG of publicly available market and financial data found 122 companies listed on the ASX were considered zombies, an increase of 31 per cent from 94 in May. The total market capitalisation of the zombie companies is now $3.1bn, up 9 per cent from $2.9bn in May 2024.”

What is a zombie company? These are companies that have been distressed for a long time but are still solvent and still in business, but only just. They’re not likely to turn it around and come back to ‘life’ as a successful company.

How do these operations get the life sucked out of them?

“A combination of stubborn inflation, sustained high interest rates, rising operating costs such as electricity and wages, along with low consumer sentiment and a crackdown on unpaid tax from the ATO has put mounting pressure on companies,” Matt Bell from The Australian explained.

After Covid, there were many businesses that were hit. Many are still struggling because of inflation, high interest rates and other challenges that have accumulated since the lockdowns of 2020 and 2021.

We’ve seen airline Rex fall into voluntary administration (VA). Yesterday we learnt that Mosaic Brands was also going into a VA. This company owns the well-known brands of Rivers, Millers, Katies and Noni B.

The mining sector has the most publicly listed zombies with a 51% increase from March to September. Now 59 of these miners are a part of the ‘walking dead’ on the ASX!

One last point needs to be made here. These are just public companies where KPMG can see their finances — but there’s a more worrying statistic the RBA has to be thinking about.

“Corporate insolvencies appointments increased 40% in the 2024 financial year to a record high of 11,049 – surpassing the peak of the global financial crisis, according to the Australian Securities & Investments Commission,” Bell reported.

And the September quarter saw a rise of 45.4% compared to the same period last year, so things aren’t getting better.

Who knows, Governor Bullock and her board might know better than me, but the RBA is no Winx when it comes to winning and getting rate cuts and rate rises right!

I’m hoping that tomorrow’s inflation will be a surprisingly good number that might encourage the RBA to be a little more adventurous, such that it cuts earlier than usual and avoids the serious slumps that often follow when they keep rates too high for too long.

I wouldn’t be saying this if the RBA had good form, but history shows that they’re not out and out champions when it comes to getting rate cuts and rises right.