(Bloomberg) -- Australia’s economic weakness persisted in the three months through June as consumers hunkered down in the face of elevated borrowing costs and stubbornly sticky inflation.
Gross domestic product advanced 0.2% from the prior quarter, helped by government spending and matching economists’ estimate, official data showed Wednesday. From a year earlier, growth slowed to 1% — the weakest annual pace since the 1990s recession, excluding the Covid-19 pandemic — from an upwardly revised 1.3% in the first quarter.
With the data suggesting that current monetary policy settings are sufficiently restrictive, money markets stuck to their view that the Reserve Bank will begin cutting rates in December. As a result, the currency and interest-rate sensitive three-year government bond yield held onto their declines.
“This weak growth is the cost of getting inflation under control,” said Alex Joiner, chief economist at IFM Investors. “With the RBA’s policy setting likely to remain unchanged for the remainder of the year the risk is second-half growth disappoints expectations of a modest recovery.”
The RBA reckons the June quarter was the nadir of the slowdown, predicting the annual expansion will accelerate to 1.7% by year’s end before picking up to 2.5% in late 2025.
Annual GDP growth has slowed markedly from a decade average of 2.4%, partly due to the RBA’s rate tightening campaign through 2022-23 to rein in inflation. The cash rate is currently at a 12-year high of 4.35% and policymakers have signaled they’re in no rush to cut any time soon.
Governor Michele Bullock said last month that it’s premature to think about easing. Her deputy Andrew Hauser last week reinforced that view, saying inflation was still a “bit stickier” in Australia than in countries like the US.
Making the RBA’s inflation fight trickier is Australia’s poor productivity growth, economists said, with today’s data showing GDP per hour worked fell further last quarter. That’s a concerning trend for policymakers given productivity growth is crucial to higher living standards and sustainable pay rises.
“Growth is anemic,” said Andrew Canobi, a fixed income director at fund manager Franklin Templeton. “Australia is stuck in a weak productivity, high cost malaise. All this equals to higher interest rates for longer.”
Most economists expect the RBA will begin cutting rates in February 2025, though the easing cycle is likely to be shallow. By comparison, the Federal Reserve is likely to cut this month with Europe, New Zealand and the UK already on an easing path.
Wednesday’s data showed the household savings ratio held at 0.6%, having slipped from a peak of 24.1% in June 2020 and underscoring the limited financial cushion available to Australians.
Household spending fell 0.2% in the second quarter, detracting 0.1 percentage point from GDP growth.
“The strongest detractor from growth was transport services, particularly reduced air travel,” said Katherine Keenan, ABS head of National Accounts. “This was the first fall for this series since the September 2021 quarter.”
What Bloomberg Economics Says...
“Weakness in 2Q24 was most acute in interest-rate sensitive sectors — especially discretionary consumption. Looking ahead, we expect growth to remain sluggish, and see GDP continuing to contract in per-capita terms through 2H24 as a tight monetary policy takes a toll.”
— James McIntyre, economist.
— For the full note, click here
The data showed government spending climbed 1.4%, led by programs for health services and adding 0.3 point to GDP growth.
“Today’s National Accounts confirm the Australian economy barely grew in the June quarter,” Treasurer Jim Chalmers said in a statement. “Really soft growth reflects the impacts of global economic uncertainty, higher interest rates and persistent but moderating inflation.”
The GDP report also showed:
- Services exports rose 5.6% in the second quarter following falls in the previous two periods. This was led by education-related travel services particularly from a rise in average spending
- Per capita GDP fell for a sixth consecutive quarter, sliding 0.4%
- Gross disposable income rose 0.9%, outpacing a rise in nominal household spending of 0.7%, the ABS said
- Higher household earnings were partly offset by an increase in income tax payable and mortgage payments
(Updates with comments from economists.)
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