Slow Growth and Rising Living Standards
Australia's economy grew by a modest 0.3% in the September quarter, bringing the annual growth rate down to 0.8%. This marks a further weakening from the already weak growth recorded in the June quarter. Economists had expected a slight uptick in the annual growth rate, but the figures show a continued slowdown since the middle of the year.
Despite the weak growth, living standards in Australia picked up noticeably in the September quarter. This was due to the government's stage 3 tax cuts and energy rebates, which boosted people's disposable income. However, this increase in income did not translate into higher spending. Instead, households opted to save more, leading to a muted impact on consumption.
The weak growth numbers raise questions about the Reserve Bank of Australia's (RBA) forecasts. The RBA had expected annual growth to pick up to 1.5% by the end of this year, but the current 0.8% growth rate suggests this target may be difficult to achieve.
Public investment, a legacy of the pandemic, has been playing a crucial role in keeping the economy afloat. After three consecutive quarterly falls, public investment in the September quarter was the highest on record. This comes after RBA governor Michele Bullock defended government spending, stating that it is helping to keep the economy on an "even keel" amidst a slow-growing private sector.
The data shows that general government investment rose 6% in the September quarter, driven by defense equipment imports and investments in hospitals and roads. National defense investment saw a significant increase of 35%. State and local public corporations investment also rose, driven by investments in roads and renewable energy.
Economists are divided on whether this level of government spending is beneficial or detrimental. Some argue that it prevents weaker growth or even recession, while others believe it contributes to higher inflation and interest rates. The debate is likely to continue.
Regardless of the debate, the weak growth rate of 0.8% is a significant miss for most economists' forecasts. It marks a new low not seen outside the pandemic since the 1990s recession. This could pose challenges for the RBA, as weak growth highlights the need for interest rate cuts, but high inflation makes it difficult to deliver them.