Tax cuts banked in two-speed economy

Population, public spending, trade and the mining states are keeping the ailing economy afloat.

National Australia Bank chief executive Andrew Irvine told a parliamentary inquiry the nation was experiencing a ‘two-speed economy’. Picture: NewsWire / Martin Ollman

Australia is running a two-speed economy as consumers hunt for value and save during a cost-of- living squeeze, while population growth and public spending provide ongoing support to demand.

On Friday, corporate leaders said shopper sentiment was at near historic lows, with many home and business borrowers hanging on in a stagnant economy that had yet to experience the uplift from personal income tax cuts worth an annual $23bn that began on July 1.

Australian Bureau of Statistics retail sales figures for July, published on Friday, showed spending stalled in the month, with basic food the only category to post a rise, after two previous months of buoyant bargain-hunting activity.

Annual growth in the value of retail trade was 2.3 per cent, which economists said was below the rate of migration-led population growth of around 2.5 per cent.

On Friday, National Australia Bank chief executive Andrew ­Irvine said the key question for Australians was how long interest rates would remain at current ­restrictive levels to bring inflation back within the Reserve Bank’s 2 to 3 per cent target range.

“In terms of what all this means to our customers, my view is that there are two Australias, and a two-speed economy operating at present,” Mr Irvine told a federal parliamentary committee.

“Customers in certain sectors and certain geographies are doing well and are ambitious to grow.

“These include mining and resources businesses and consumers living and working in parts of Western Australia, the NT and Queensland. In other sectors and geographies, customers are doing it much tougher. These include retail and parts of the construction industry. Victoria and NSW are under more pressure than other states.”

Mr Irvine said he expected the economy would grow more quickly in the second half of the year, but cautioned consumers were having to make “tough decisions” around spending.

On Wednesday, the ABS will release the June quarter national accounts, with private economists and Reserve Bank staff ­expecting a small increase in gross domestic product of ­between 0.1 and 0.2 per cent.

If the lower estimate is ­realised, annual output growth could drop to 0.8 per cent, the weakest GDP result (outside of the pandemic) since the deep ­recession of the early 1990s.

Economists said while housing and business investment had stalled, government consumption and capital works had propped up activity, with the central bank citing expansionary budgets as a factor behind persistent inflationary pressures.

After this month’s policy meeting, RBA governor Michele Bullock said “a near-term ­reduction in the cash rate doesn’t align with the board’s current thinking”.

This week, the ABS reported underlying inflation was 3.8 per cent in the year to July, down from 4.1 per cent in June. Westpac head of Australian macro-forecasting Matthew Hassan said the ABS retail turnover release was “clearly a disappointing result given the context of tax cuts”. “While other indicators had suggested relatively little of the boost to income was spent in July, to get a ‘doughnut’ on retail sales despite this, price inflation and population growth implies real per capita retail sales were not just soft but weakened materially in July,” Mr Hassan said.

Speaking after reporting Harvey Norman’s annual results on Friday, chief executive Gerry Harvey said sales in the new ­financial year were now tracking better. “We are talking about an economy that is supposed to be getting more difficult to drop ­interest rates and yet our sales are not necessarily demonstrating that,” Mr Harvey said.

“There is still a lot of money out there, there’s more people out there, so if you had to guess how it is going to go over the next 12 months it looks like our sales will be higher, but the thing that beats us – and that’s all businesses – is the cost of doing business.

“The biggest cost of the lot is wages, power and all the different things you have to do ­because of regulators and compliance. It is getting more difficult to make a profit.”

In a sign that cost-of-living pressures were hitting hard, Ramsay Health Care’s chief financial officer, Martyn Roberts, said ­patients were choosing to avoid surgeries in the private sector, mainly due to out-of-pocket fees.

“We’ve seen quite a double-digit increase in private activity in public hospitals,” he said.

“Some people are choosing, even if they’ve got private ­insurance, to go to the public ­­system.”

Commonwealth Bank economist Stephen Wu said the flat outcome in the July retail trade number suggested consumers were reluctant to spend much out of the stage-three tax cuts.

“The discretionary categories of retail, such as clothing, eating out, liquor and recreational goods, all declined in the month,” Mr Wu said. “But essential spending, such as on groceries, rose. Spending on food at home and on pharmaceutical, cosmetic and toiletry goods retailing is at ­record highs, while all other categories of retail spending are below their peak levels.”

Additional reporting: Eli Greenblat, Cameron England