Australia’s economy grew at a weaker-than-expected pace in the September quarter despite extra government spending, and slow pace may make early interest rate cuts more likely. The Australian dollar slumped.
Gross domestic product (GDP) expanded 0.3% in the July-September months, the fastest in a year and the 12th quarter in a row of growth, the Australian Bureau of Statistics said on Wednesday. That pace compared with the 0.5% rate expected by economists and the 0.2% growth in the June quarter.
GDP was 0.8% larger than for the September quarter a year earlier, the weakest since the end of 2020. Economists had expected annual growth to come in at 1.1%, or similar to the 1% rate the ABS had stated for the June quarter.
Excluding the swelling population, though, GDP as measured on a per capita basis continued to retreat. It eased 0.3%, sinking for a record seventh straight quarter.
The RBA’s latest forecasts had GDP expanding at an annual pace of 1.5% by the end of 2024 and today’s numbers suggest that estimate will have to be revised lower.
While the central bank will want to be sure underlying inflation is headed to a 2 to 3% range before it starts lowering the cash rate, it will have taken some comfort from households’ behaviour in the September quarter.
Their savings rate ticked up from 2.4% in the June quarter to 3.2% for the quarter just ended. Nominal spending rose by 0.6% even as households’ disposable income rose 1.5%, implying that people were pocketing most of the stage-three tax cuts and real wage increases. Income taxes paid dropped 3.8%.
The treasurer, Jim Chalmers, said the growth in real incomes was “the most encouraging aspect of the data” and that overall activity would have fallen without government intervention.
“We’d rather be part of a soft landing in our economy than [having] to clean up after a hard one,” Chalmers said.
However, his opposition counterpart, Angus Taylor, said the government had “lost control of its spending”, with living standards falling the most among OECD nations.
“Productivity has fallen off a cliff. It has collapsed 6% since the [May 2022] election,” Taylor said. Output per hour fell for a second consecutive quarter and was 0.8% lower than for the September quarter of 2023, the ABS said.
Governments have helped the economy avoid an overall contraction, even as the Reserve Bank lifted interest rates at the fastest clip in three decades. Public demand contributed 0.7 percentage points to quarterly GDP growth, the ABS said on Tuesday.
Still, those outlays prevented the unemployment rate in 2024 rising much above 4% so far, a figure close to the lowest in half a century. Employment in seasonally adjusted terms rose by 156,600 in the September quarter alone.
More recent data indicate the economy is gathering steam. Retail turnover in October rose 3.4% before inflation, the most in 17 months, while building approvals were the most in 25 months. A services industry survey found sentiment is now at its highest in 30 months, S&P Global reported on Wednesday.
Prior to today’s GDP figures, investors saw little chance the RBA would cut its cash rate from the present 4.35% level at its board meeting next week.
The dollar dropped against its US counterpart as investors shifted their bets on when the RBA may start cutting rates. By mid-afternoon (AEDT), it was down to 64.2 US cents from about 64.85 US cents just prior to the data release.
The slide of about 1% was similar against other currencies, including the Japanese yen. Traders have now fully priced in an RBA cash rate cut to 4.1% by the bank’s 1 April meeting compared with a 60% chance yesterday, according to Bloomberg.
“The quarterly growth in domestic prices was the lowest observed since March 2021,” the ABS’s head of national accounts, Katherine Keenan, said. “The growth this quarter reflected softening goods prices in the economy alongside more resilient services prices reflecting high demand for labour and costs of essential services such as rent, education and health.”
Public investment jumped 6.3% in the September quarter – rising for the first quarter in a year to a record total – driven higher by more spending on defence equipment and outlays for roads and renewable energy, the ABS said.
“Social benefits paid to households increased this quarter as households received energy cost relief rebates, including the Energy Bill Relief Fund”, Keenan said. “At the commonwealth level growth in social benefits to households was lower, including NDIS and aged care, compared to recent quarters.”
Pat Bustamante, a Westpac senior economist said annual growth was the slowest since the early 1990s recession.
Average non-farm earnings an hour grew 1.3% in six-month annualised terms, down from a 2.3% a year pace in the June quarter and well below the pre-pandemic average of 1.8%, Bustamante said.
The head of macroeconomic forecasting for Oxford Economics Australia, Sean Langcake, said GDP growth would probably pick up slowly in coming quarters.
“[The] fundamentals for an improvement in consumption growth are favourable,” he said. “But this improvement will be unspectacular, with the economy set to endure below trend growth in the near term while capacity constraints continue to bite.”
