Salem Radio Network News Wednesday, February 28, 2024

Business

Australia’s economy slows to a crawl, consumer spending surprisingly weak

By Stella Qiu

SYDNEY (Reuters) – Australia’s economy barely grew in the third quarter as exports flagged and households – reeling from a surge in mortgage payments – were reluctant to spend, suggesting rate hikes were working to restrain demand.

Marking an eighth straight quarter of growth, albeit its slowest in a year, real gross domestic product (GDP) inched 0.2% higher in July-September from the previous quarter. That was short of forecasts of 0.4% and a result that bolsters the case for the Reserve Bank of Australia to no longer need to tighten.

Annual GDP growth stood at 2.1%, little changed from the previous quarter, the data from the Australian Bureau of Statistics showed on Wednesday.

“Australia’s economy hit the wall in the September quarter,” said Andrew Hanlan, an economist at Westpac, adding it was surprising to see just how weak consumer spending was during the quarter.

“The intense headwinds of high inflation, sharply higher interest and additional tax obligations are having a significant impact, leading to a sharp decline in real household disposable income.”

Indeed household spending was flat quarter on quarter and has barely grown for four quarters in a row, its worst stretch since the global financial crisis.

Income tax paid jumped 23% from a year ago after the expiry of a tax offset scheme and mortgage payments surged 71% as more people came off fixed-rate mortgages onto higher variable rates.

That pushed the household savings ratio to drop further to 1.1%, its lowest level since 2007.

The slowdown is seen as a necessary consequence of monetary tightening by the Reserve Bank of Australia so that inflation can be tamed back to its 2-3% target range. Inflation was 4.9% in October.

The central bank on Tuesday opted to stand pat to allow more time to assess the impact of a whopping 425 basis points jump in interest rates since May last year.

Markets now figure that the RBA doesn’t have to hike any further, given the dovish turn from the Federal Reserve and European Central Bank in recent weeks, with aggressive rate cuts priced in for next year.

Gareth Aird, head of Australian economics at Commonwealth Bank of Australia, said there was a clear risk that real GDP growth could turn negative in the fourth quarter.

He added that he believes rates have peaked and the easing cycle will start in the third quarter next year.

“A month ago the risks to our call were skewed towards rate cuts starting at a later date. But the run of both domestic and international data over the past month suggests the risks are now more evenly balanced.”

Net exports subtracted 0.6 percentage points from gross domestic product as prices for some commodity exports fell.

Productivity – in the measure of output per hour worked – increased 0.9% in the quarter after four straight quarters of declines. RBA’s forecasts of inflation returning to its 2%-3% target in late 2025 hinge on a pickup in productivity.

(Reporting by Stella Qiu and Wayne Cole; Editing by Sonali Paul and Edwina Gibbs)

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