Australia’s Economic Growth Report
According to the Australian Bureau of Statistics (ABS), Australia’s economy experienced a growth of 0.3% in the September quarter and 0.8% over the past year. This indicates a further weakening in the annual growth rate from what was already significantly low in the preceding June quarter.
While some economists anticipated a rebound in the annual growth rate from 1%, the latest data reveal a continued deceleration since mid-year, culminating in a meager growth of 0.8%.
Context of Economic Slowdown
Just three months prior, Treasurer Jim Chalmers expressed concerns that the Reserve Bank’s 13 interest rate hikes were adversely impacting the economy. Additionally, Marcel Theiliant from Capital Economics stated, “The weakness in GDP growth adds to the case for looser monetary policy.” He maintains that the Reserve Bank may initiate a short easing cycle in the second quarter of the upcoming year.
According to IG analyst Tony Sycamore, market participants now estimate an 80% chance of the Reserve Bank implementing a 0.25 percentage point interest rate cut by April 2025.
Interestingly, while growth struggled, living standards showed improvement in the September quarter, largely due to government tax cuts and energy rebates that effectively increased households’ disposable income. However, this increase did not lead to higher consumer spending.
Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, noted, “On average, households responded by saving more rather than increasing consumption.” He predicts gradual GDP growth in the forthcoming quarters, although it will likely remain below trend due to ongoing capacity constraints.
Overall, analysts assert that the dismal growth figures raise questions about the Reserve Bank’s forecasts. The Bank had projected an annual growth increase to 1.5% by year-end, making the current 0.8% growth rate challenging to reconcile with its earlier expectations.
Public Investment’s Role in Economic Stability
The ABS data indicates a significant reliance on government spending for economic activity in the September quarter, with public investment marking the largest increase on record following three consecutive quarterly declines.
RBA Governor Michele Bullock recently defended the current level of government expenditure, arguing that it is pivotal in maintaining economic stability, particularly given the slow growth of the private sector. She stated, “If it wasn’t there… things might well be much worse in terms of the employment market.”
In the September quarter, general government investment rose by 6%, driven primarily by significant expenditures in defense, healthcare, and infrastructure. Notably, national defense investment increased by an impressive 35%.
Cherelle Murphy noted, “Government spending and investment climbed to a record high share, at 28% of GDP in the September quarter,” indicating that while growth hovered at 0.8% annually, robust government spending is evident across Australia.
Challenges of Anemic Growth for the RBA
Economists are split on the effects of government spending, with some arguing that it mitigates the risk of recession while others contend it keeps inflation and interest rates elevated due to excessive funding related to the National Disability Insurance Scheme (NDIS).
Alex Joiner, chief economist at IFM Investors, pointed out that the annual growth rate of 0.8% represents a significant deviation from most economists’ forecasts. This situation is regarded as a “new cyclical low” not witnessed outside of the pandemic since the recession of the 1990s.
He emphasized the need for the Reserve Bank’s forecasts to perhaps be adjusted, given that their projections for the December quarter 2024 stand at 1.5%. An immediate growth improvement will be necessary to achieve this target amid ongoing inflationary pressures.
Joiner concluded that while weak growth underscores the necessity for interest rate cuts, the challenge for the Reserve Bank remains due to persistently high inflation levels.
