The Australian economy has shown signs of slowing down, with growth recorded at just 0.3% for the September quarter of 2024. Despite some positive signals from government spending, the overall outlook remains subdued, highlighting challenges caused by rising interest rates and persistent inflation.
Data from the Australian Bureau of Statistics (ABS) indicated this latest growth figure is the weakest since late 2020, and considerably lower than the previous year's growth of 0.8%. Year-on-year, the economy's growth was pegged at 0.8%, falling short of earlier expectations and showcasing a deceleration trend.
According to Katherine Keenan, ABS Head of National Accounts, "The Australian economy grew for the twelfth quarter in a row, but has continued to slow since September 2023." This slow growth signals little consumer appetite as high interest rates keep wallets closed. Household spending remained stagnant, with no increase during the latest quarter following 0.3% decline reported previously.
Government investments and public sector spending propped up the economy during this period. Public investment surged by 6.3%, marking record levels primarily due to defense-related expenses, hospital upgrades, and extensive infrastructure projects focusing on roads and renewable energy. The increase followed three consecutive quarterly falls and reflected the government's commitment to bolstering the economy, even as private sector contribution lagged.
Household income benefitted from government policies like stage 3 tax cuts, which lowered household income tax payments by 3.8%. Disposable income for households grew by 1.5%, leading to decreased expenditures on necessities, as bills for electricity and gas fell significantly due to energy rebates. "Despite this offsetting effect from rebate measures, overall consumer spending appears unaffected, as households preferred to put aside more savings," noted Sean Langcake, head of macroeconomic forecasting for Oxford Economics. The household saving ratio even rose to 3.2% from 2.7%.
Interestingly, net trade positively influenced GDP growth, driven largely by a 0.9% rise in goods exports as imports fell by 1.5%. Still, services trade weakened due to fewer international students arriving and increased travel by Australians overseas, especially to Europe and Asia.
While the labor market remains solid, featuring low unemployment rates and high participation levels, job vacancies are diminishing. Inflation also eased, with annual inflation down to 2.8%, marking the lowest level since 2021. Inflation on goods sharply dropped to 1.4%, propelled by declining costs of electricity and fuel. Conversely, services inflation reflected higher living costs, sitting at 4.6% due to rent and insurance hikes. Wage growth saw some slowdown at 3.5%, following smaller adjustments to the minimum wage compared to previous years.
Despite the easing inflation, the Reserve Bank of Australia's (RBA) monetary policy holds steady at current rates, remaining cautious about any immediate cuts until it sees stronger signals of sustainable growth alongside controlled inflationary trends. RBA Governor Michele Bullock emphasized last week, "We expect the underlying inflation to stabilize before we even contemplate any adjustments to interest rates." The bank has maintained its benchmark rate at a 13-year high of 4.35% since late last year as part of its long-term strategy against inflation.
Economists are closely watching the RBA's upcoming policy meeting as analysts assess both the weak growth numbers and volatile inflation rates. Prior to the latest quarterly reports, there were predictions growth rates could ramp up to as much as 1.5% by December. Now, following the current statistics, such forecasts may need revision, and future growth expectations might lean more conservatively at around 0.8% annual growth.
Marcel Theiliant from Capital Economics remarked, "The weakness in GDP growth adds to the case for looser monetary policy," forecasting potential RBA easing cycles as soon as the second quarter of next year. On the other hand, Tony Sycamore from IG noted there’s around an 80% chance of the RBA cutting interest rates by 0.25 percentage points within the same timeline if current trends persist.
Although the weak growth signals concerning bounce-back prospects exist for 2025, experts express their belief we could witness some picks here and there during the upcoming quarters. "We expect incremental improvement but not to the point of translating strong growth just yet," said Langcake.
Public sector investment remains pivotal, with figures showing it reached unprecedented levels representing 28% of GDP during the September quarter. This heavy emphasis on government expenditures, particularly following the pandemic, signifies the government's commitment to sustaining economic activity even as private demand falters.
There is still debate among economists on whether such high government spending is beneficial or detrimental. While some argue it keeps the economy afloat and prevents more severe downfalls or recession, others maintain it keeps inflation high along with persistent interest pressures, linked somewhat to the elevated National Disability Insurance Scheme expenditures.
According to several reports and analyst insights, it's evident the Australian economy is at a crossroads, grappling with the dual challenges of stagnation and gradual inflation alleviation. Whether it can rebound successfully from this low growth phase hinges largely on consumer confidence returning and the potential effectiveness of government initiatives moving forward.
