Australia’s longest per capita recession since WWII comes to an end

The longest hit to Australians’ living standards since World War II has finally come to an end, with households showing signs of life and delivering Prime Minister Anthony Albanese the chance to use the coming election campaign to focus on his economic record.

As the Reserve Bank said it believed the country had moved beyond the economic “narrow path”, figures from the Australian Bureau of Statistics showed the economy expanded by 0.6 per cent in the December quarter, lifting annual growth to 1.3 per cent.

It was the strongest quarterly improvement since the December quarter of 2022, while the rate of annual growth increased for the first time since early 2023.

GDP per capita, which accounts for the size of the population and is a proxy for household living standards, grew by 0.1 per cent. It ended seven consecutive falls in this key indicator, the worst run on record.

After falling for six months, household spending lifted by 0.4 per cent in the quarter. Some of the improvement was driven by extra spending on hospitality services at major sporting events such as the Australia-India Test series, which drew record crowds.

While more than half of the growth experienced in the December quarter came from the private sector, government spending – especially states’ expenditure on teachers, police and the health system – is still holding up the entire economy. Government infrastructure spending on everything from roads to rail climbed by 1.8 per cent in the quarter to be 8.1 per cent higher over the year.

Fans flocking to the Australia-India Test series helped boost economic growth in the December quarter.Credit: Photograph by Chris Hopkins

The public share of economic activity reached 27.7 per cent which, outside of the pandemic and World War II, remained at a record high. Commonwealth spending fell by 0.1 per cent in the quarter but still remained at elevated levels.

Treasurer Jim Chalmers, noting uncertainty around the economic outlook from factors such as Cyclone Alfred and the Trump Administration’s tariff agenda, said the figures showed the start of a private sector-led recovery and broader growth.

“This is very encouraging to see that, for the first time in a while, there is a substantial contribution from the private sector when it comes to our economy,” he said.

But shadow treasurer Angus Taylor, who argued Australians were still in a per capita recession, said the economy was still struggling.

“This is not a strong economy. This is not an economy which will lead to prosperity. This is not an economy which will support aspiration and hard-working Australians,” he said.

The government plans to use the turnaround in growth as part of its broader economic pitch to voters that under Albanese inflation had fallen, Australians were enjoying real wages growth, unemployment had remained low with a record number of people in work, and interest rates had started to fall.

But the figures confirmed the size of the financial hit taken by households over the past two years. GDP per person peaked at $97,346 in the 12 months to the end of March 2023. Even after the lift in the December quarter, GDP per capita is at $95,912.

While households increased their overall spending, they cut expenditure on cigarettes and new cars. The 5.7 per cent drop in legal tobacco purchases by households stripped 0.1 percentage point from the overall growth figure.

Household savings also increased marginally through the quarter, suggesting a large share of the stage 3 tax cuts – which started on July 1 – remain in bank accounts.

By industry, the largest increase was for the agriculture sector, which enjoyed a 7.3 per cent bump in the quarter. This was due largely to higher levels of livestock production, particularly beef, which is being shipped to meet demand in drought-affected America.

KPMG chief economist Brendan Rynne said it appeared the economy had turned the corner.

“The focus will now be on whether the upswing can be sustained and whether the private sector can take over from the public sector in driving growth. The escalating global trade war has the potential to disrupt this momentum,” he said.

Deloitte Access Economics partner Stephen Smith said there were signs of green economic shoots starting that should result in stronger growth this year and next.

“However, this firming outlook represents the economy kicking into gear rather than firing on all cylinders. Alongside migration, growth in 2024 was propped up by government spending, which is still running at a near record share of GDP,” he said.

“Unless more is done to encourage private sector growth and investment, there’s limited upside to the economic turnaround, particularly given the global economic environment appears to be darkening.”

The figures pre-date the Reserve Bank’s interest rate cut last month, which will free up billions of dollars for people paying off mortgages.

Previous Reserve Bank governor Philip Lowe coined the term “narrow path” to describe the difficulties facing the country to bring down inflation while maintaining as many people as possible in work.

But in a speech in Sydney on Wednesday, RBA deputy governor Andrew Hauser said recent data, including inflation and unemployment, had shown encouraging signs about the economic outlook.

According to Hauser, the narrow path may have been left behind. “We look to be moving on from the narrow path,” he said.

Hauser, however, cautioned that Donald Trump’s tariff agenda – which he doubled down on during his speech to US Congress on Wednesday – could deliver the global economy an unexpected hit.

He said recent falls on global share markets were a recognition that there could be financial pain as businesses and consumers bear the brunt of tariffs.

“It may also reflect a growing recognition that, if companies and households come to conclude that trade policy uncertainty has moved on from classical uncertainty (‘carry on till the fog lifts’) to genuine ambiguity (‘almost anything could happen’), they may choose to batten down the hatches – postponing planned spending, particularly on longer-term capital investment, until things become clearer,” he said.

“Such ‘watchful waiting’ could prove rational individually, but economically damaging in aggregate.”

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