Australia’s economy grew 0.1% from the previous quarter, according to data released by the Australian Bureau of Statistics (ABS) on Wednesday. This figure fell short of market expectations of a 0.2% increase.
On an annual basis, the economy expanded by 1.1%, down from 1.5% in the previous quarter. This marks the slowest growth rate in three decades, excluding the pandemic period.
Here’s what happened in the Australian economy during the March quarter 2024. Read more here https://t.co/OuiNdKA5Lw pic.twitter.com/hY8kLlwcgH
— Australian Bureau of Statistics (@ABSStats) June 5, 2024
Consumer Spending
Household spending, which constitutes half of the GDP, increased only 1.3% over the year. This modest increase was primarily driven by essential expenditures on items such as electricity and healthcare, while discretionary spending remained almost flat. The lack of strong consumer spending is further fuelled by a historically low savings rate, which fell to 0.9% after significant downward revisions to previous figures.
“Given that the savings rate was around 5% before the pandemic, that underlines the severe pressure households have been facing due soaring living costs, interest payments and taxes,” said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics, “And with real incomes stagnating last quarter, that pressure hasn’t fully faded yet.”
Interest Rate and Inflation
Financial markets have already rejected the possibility of further rate hikes by the Reserve Bank of Australia (RBA), which currently holds a cash rate of 4.35%. However, there is also little expectation of a rate cut. Futures indicate a roughly 50-50 chance of a rate change by December, with a potential cut to 4.10% not fully expected until May next year.
RBA Governor Michele Bullock acknowledged the economy’s state during a recent address to lawmakers, describing it as “very, very weak.” Despite this, she emphasized the need for restrictive monetary policy to balance demand and supply and curb inflation. The latest consumer price index showed an unexpected rise to 3.6% in April due to widespread increases in costs, including food, health, clothing and travel.
Inflation measures within the GDP report remained high, with domestic demand inflation running at 4.6% for the year. However, this pressure has had a mixed impact on nominal GDP, which rose 3.5% annually, bringing the total to A$2.6 trillion, or A$98,224 per capita. Adjusted for inflation, per capita GDP fell by 0.4% for the quarter and by 1.3% over the year.
Migration and Housing
The inflow of overseas workers and students has boosted population growth to 2.5% annually, double the average of the past three decades. While this has contributed to economic activity, it has also increased pressure on the housing market, leading to record-high rents and prompting the Labor government to propose future immigration caps.
Investment Trends
Government expenditure offered some support to GDP, rising by 1.0% in the March quarter.
Public investment decreased for the second consecutive quarter, with notable reductions in water, energy, transport, health, and education infrastructure projects.
Net Trade
Imports rose by 5.1% compared to a 0.7% increase in exports. A buildup in inventories, particularly within the mining sector, contributed positively to GDP, balancing out some of the declines from net trade.
Labor and Household Income
Compensation of employees (COE) grew by 1.0% in the quarter, the smallest increase since September 2021, showing a slowdown in labour market growth.
The household saving ratio fell to 0.9% due to minimal growth in household income and financial pressures. Despite a slight reduction in income tax payable, the overall saving rate remained at historic lows.
Looking Forward
The RBA predicts annual economic growth will hit a low of 1.2% mid-year before gaining momentum. However, it is anticipated that the RBA will only begin easing its policy stance later in the year, as inflationary pressures and household financial stress continue to weigh on the economy.
