Economic Slowdown in Australia

By Stella Qiu

SYDNEY (Reuters) – Australia’s economy remained sluggish in the June quarter, affected by high borrowing costs and persistent inflation, with government spending as the primary growth driver.

Data from the Australian Bureau of Statistics released on Wednesday highlighted continued domestic price pressures, reinforcing the central bank’s hesitation to lower rates, despite market speculation for a December policy easing.

Real gross domestic product (GDP) increased by 0.2% in the second quarter, unchanged for three consecutive quarters, slightly below market forecasts of 0.3%. Annual growth declined to 1.0% from 1.3% in the previous quarter, reaching lows not seen since the 1990s recession, excluding pandemic-related distortions.

In this quarter, household spending, constituting half of GDP, fell 0.2%, as individuals reduced overseas travel expenses. The savings rate remained low at 0.6%.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, commented, “The economy is lacking a clear engine of growth. Tight policy settings have successfully reined in demand, but inflationary pressures are yet to be completely tamed.”

He added that income tax cuts and consumer subsidies would support momentum in the second half of the year, although any improvement would be modest.

The Reserve Bank of Australia (RBA) has significantly influenced the downturn, raising interest rates to a 12-year high of 4.35% to manage demand and inflate pressures. However, core inflation remained elevated at 3.9% last quarter.

Productivity, a measure of output per hour worked, fell by 0.8% in the quarter, raising concerns for the RBA, whose inflation forecasts aimed to return to the target range of 2-3% by 2026, closely tied to productivity increases.

Treasurer Jim Chalmers described the GDP figures as “soft and subdued,” but aligned with expectations, attributing economic boosts mainly to government spending in health.

Waiting for Growth

The RBA predicts economic growth will rise to 1.7% in the fourth quarter, assuming two strong quarters in the latter half of the year, although current signs show limited evidence of consumer spending recoveries as households save most tax cuts.

Retail sales in July were flat, indicating that large-scale tax cuts had not significantly increased spending, and card data from Westpac for August reflected only a slight improvement, suggesting that fiscal support’s impact on demand is minimal.

Despite financial markets estimating a 90% chance of a rate cut in December, policymakers seem to have ruled out easing within this year.

Price measures in the GDP report also indicated elevated inflation, with domestic demand inflation at 4.2% annually.

Terms of trade declined by 3% due to decreasing commodity prices.

While this inflation has helped nominal GDP grow by 4.4% year-on-year until June, real per capita GDP saw a decrease of 0.4% for the quarter, marking the sixth consecutive quarter of decline.

Tony Sycamore, an analyst at IG, noted, “Given the current growth trajectory and against the backdrop of stubborn inflation and subdued consumer spending, it’s not entirely clear where the rebound in growth will come from, barring pre-emptive RBA rate cuts.”

(This story has been corrected to fix the annual growth rate for Q1 to 1.3%, not 1.2%, in paragraph 4.)