Australia’s economy has grown – but only just

Treasurer Jim Chalmers says the federal government’s upcoming May budget will have to respond to sluggish economic growth after new figures showed the economy barely grew in the final months of 2023 and is expected to limp through to the middle of the year, before expected interest rate cuts and tax relief.

In the final three months of 2023, the economy expanded by a slight 0.2 per cent, taking annual economic growth to 1.5 per cent.

Treasurer Jim Chalmers said soft economic growth was still good, considering the global and local economic headwinds.Credit: Alex Ellinghausen

The Australian Bureau of Statistics said that growth was driven by government spending and private business investment, while household spending barely moved.

Chalmers said slow economic growth was still significant as the economy grappled with higher interest rates, high but easing inflation, and global uncertainty.

“The economy grew a little but not a lot. Even weak growth is welcome growth in the circumstances,” he said, pointing to countries that either ended 2023 in a recession, had a technical recession or narrowly avoided one.

The federal budget, to be released in May, is shaping as a crucial turning point for the economy. Last year, the government delivered the first surplus since 2007 and is expected to keep the budget in the black this year.

Chalmers said the government has been successful so far by focusing solely on inflation and improving the budget bottom line, but that focus would change over time.

“Every budget tries to strike a series of fine balances. And in this budget in May, we’ll be balancing the fact that inflation is coming off in ways that we welcome, growth is slowing, and we need to address both of those challenges at once,” he said.

But Opposition Leader Peter Dutton said it was Prime Minister Anthony Albanese’s fault that the economy was barely moving.

“I don’t think Mr Albanese has a clue when it comes to the economy or what he’s doing. I don’t think he’s got the ticker, I don’t think he’s got the strength to lead our economy and to make the tough decisions to keep Australians safe,” he said in Perth on Wednesday.

Government spending rose by 0.6 per cent through the December quarter, due to an increase in defence spending, government payments to households and an increase in medical product spending. The bureau also noted the Voice referendum, held in October, lifted government spending across the country.

Household spending increased by just 0.1 per cent in the December quarter as consumers swapped eating out for cooking at home to help manage costs. Households increased spending on essentials, including electricity, rent, groceries and health, by 0.7 per cent, which was offset by a fall in discretionary spending (down 0.9 per cent).

Economists hope the economy has reached a cyclical low and said the results mean the next interest rate move from the Reserve Bank is likely to be down.

Population growth has also helped keep the economy growing. On a per-person basis, the economy went backwards 0.3 per cent in the December quarter, the third negative quarter in a row, and fell by 1 per cent through the year.

Without that population growth, Betashares chief economist David Bassanese said the economy would have “almost certainly” ended up in a recession, and Wednesday’s figures meant the Reserve Bank was likely to move away from a tightening bias at its next meeting.

“With falling inflation and recessionary levels of consumer spending and housing construction, the economy warrants less restrictive policy conditions within the next three to six months,” he said.

Financial markets are now expecting the Reserve Bank, which lifted the cash rate in November, to start cutting rates by September, if not earlier. The federal government’s revamped stage 3 tax cuts kick in on July 1.

KPMG chief economist Brendan Rynne said the fact wages growth has peaked, and the labour market is now shedding jobs added to the argument that there was no longer a need to keep monetary policy settings tight.

“These very weak numbers … are likely to continue into this year, meaning the RBA might reduce the cash rate sooner and faster than currently envisaged, though not later this month,” he said.

EY chief economist Cherelle Murphy said the economic figures were not worrying – rather, they meant the Reserve Bank would not need to raise interest rates further to get inflation down.

“As the pandemic and its aftermath continues to wash through the economy, we can’t say we are at the end of the slowdown just yet. But almost,” she said.

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