(Bloomberg) -- Australia’s economic growth remained sluggish last quarter as a surge in government spending underpinned the expansion, highlighting the Reserve Bank’s policy challenge as inflation is still stubbornly sticky.
Gross domestic product rose 0.8% from a year earlier, the weakest reading — excluding the pandemic — since December 1991, when the economy was mired in recession, official data showed Wednesday. On a per capita basis, GDP slid for a seventh consecutive quarter, also the worst result since 1991.
The data sparked a drop in the currency — down 1% — and a fall in policy sensitive three-year government bond yields. Swaps traders boosted bets to fully price an April interest-rate cut, compared with about 60% odds yesterday.
“Weak growth highlights the need for interest rate cuts but this is difficult for the RBA to deliver given inflation remains uncomfortably high,” said Alex Joiner, chief economist at IFM Investors. “The economy remains over-reliant on the public sector and population growth and suffers from a lack of productivity. This growth mix will need to change.”
The RBA has been trying to slow demand in the economy to ease price pressures, and while it has succeeded in the former, the latter is failing to follow the script. Inflation has only come down slowly and at an underlying level remains above the central bank’s 2-3% target.
“The economy is undeniably weaker than the RBA had assumed,” said Callam Pickering, economist at global job site Indeed Inc. “Now is that enough to offset a very tight labor market and relatively high underlying and service sector inflation? Probably not, but it will give the RBA plenty to think about.”
Annual economic growth looks set to fall short of the RBA’s forecast 1.5% by year’s end, and is well below the decade average of 2.3%.
The result is also going to intensify pressure on the government to keep increasing spending to support the economy, particularly as it faces a tight election due in the next six months. The one consistently positive metric has been the labor market, with hiring holding up and unemployment still at a historically low 4.1%.
The upshot has been a cautious central bank that has kept the cash rate at 4.35% for the past year. By comparison, the Federal Reserve may cut for a third straight meeting this month.
What Bloomberg Economics Says...
“ Lower borrowing costs are required for an enduring pickup in growth to take hold. We don’t expect the RBA to start cutting rates until 1Q25 at the earliest.”
— James McIntyre, economist.
— For the full note, click here
Wednesday’s report showed the household savings ratio climbed to 3.2% as Australians saved tax cuts and government cost-of-living support measures.
Household spending was flat and contributed nothing to third-quarter GDP growth. A key factor there was electricity and gas spending as energy bill relief rebates were treated as a shift from household to government expenditure in the national accounts.
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“If you’re the RBA and the case to cut isn’t compelling, you’d probably wait for cleaner data and more data,” said Su-Lin Ong, chief economist at Royal Bank of Canada. “The key is that there is still considerable uncertainty over the household consumption outlook and the RBA also appears uncertain.”
Further complicating the RBA’s inflation fight is Australia’s poor productivity, economists said, with Wednesday’s data showing GDP per hour worked fell again last quarter.
The report also showed:
- GDP rose 0.3% in the third quarter from the prior period, below economists’ estimate for a 0.5% increase
- Government spending rose 1.4%, adding 0.3 percentage point to GDP growth
- Non-dwelling construction fell 2.7%, cutting 0.1 point from GDP
- “The quarterly growth in domestic prices was the lowest observed since March 2021,” the ABS said. That reflected “softening goods prices in the economy alongside more resilient services prices”
--With assistance from Garfield Reynolds.
(Adds comments from economists.)
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