Economic Update: Australia’s Slow Growth in Q3

By Stella Qiu
SYDNEY (Reuters) – Australia's economy grew at its slowest annual pace since the pandemic in Q3, disappointing hopes for a rebound as government spending was the main contributor while consumers remained cautious.

Investors pushed the Australian dollar down by 0.7% to $0.6442. Markets are now almost fully pricing in a rate cut next April, moving from a 73% to a 96% likelihood, with expectations of a 35 basis points easing in May, previously 28 bps.

Data from the Australian Bureau of Statistics (ABS) showed real GDP rose by 0.3% in the September quarter, missing the market forecast of 0.4%. Annual growth decreased to 0.8% from 1.0% in the previous quarter, contrary to expectations for a slight increase to 1.1%. This is the slowest growth recorded since late 2020.

The Reserve Bank of Australia anticipated a growth rise to 1.5% by year-end, fueled by tax cuts impacting household incomes and consumer confidence rising amidst stable interest rates. However, the unexpectedly weak Q3 results cast doubt on that forecast.

Shane Oliver, chief economist at AMP, mentioned that weak GDP numbers argue for an earlier rate cut. "The weakness we're seeing in the economy, particularly the private sector, suggests there's still a high chance for a cut in February."

The ABS attributed the growth to public sector spending, which added 0.6 percentage points, driven by record public investment. On the other hand, household spending, a component that typically constitutes half of GDP, showed no contribution.

Treasurer Jim Chalmers emphasized the GDP growth as weak and below historical averages, stating, "Our economy is still growing but very slowly, affected by interest rates, cost of living pressures, and global economic uncertainties."

Consumers Remain Cautious

The central bank has maintained interest rates at a 12-year high of 4.35% for the past year, with little inclination to ease. The weak economic performance indicates that monetary policy is effectively slowing demand.

Despite the RBA expecting consumer spending to rise from tax cuts and decreasing inflation, consumers appear cautious, even as disposable income grew by 1.5% in the quarter. The savings rate also increased to 3.2%, courtesy of tax cuts. However, GDP per capita fell by another 0.3%, marking the seventh consecutive quarter of decline.

Recent signs suggest consumers are more optimistic, with retail sales increasing for three consecutive months in October. Consumer sentiment rose, and spending during the Black Friday sales event indicates ongoing momentum into November.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, noted, "We expect GDP growth to slowly pick up… But this improvement will be unspectacular, as the economy is likely to experience below-trend growth in the near term due to ongoing capacity constraints."

The report revealed positive news regarding inflation, with the GDP chain price index decreasing to 2.4% last quarter, and an annual growth rate of real unit labor costs slowing to 1.6%. Meanwhile, productivity, which measures output per hour worked, dropped by 0.5% in the quarter, a concerning signal for the RBA as they forecast inflation returning to the 2% to 3% target band by 2026, dependent on improved productivity.