Positive metric: RBA governor Michele Bullock speaks at a conference in Sydney. The central bank 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. — Bloomberg
SYDNEY: Australia’s economic growth remained sluggish last quarter as a surge in government spending underpinned the expansion, highlighting the central bank’s policy challenge as inflation is still stubbornly sticky.
Gross domestic product (GDP) 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 yesterday.
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 on Tuesday.
“Weak growth highlights the need for interest rate cuts but this is difficult for the Reserve Bank of Australia (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% to 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 labour market and relatively high underlying and services 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 the end of the year, 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 labour 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 US Federal Reserve may cut for a third straight meeting this month.
Yesterday’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.
“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 yesterday’s data showing GDP per hour worked fell again last quarter. — Bloomberg
