Economic growth slows but household spending resilient

Signs of strength in consumer spending or further disappointment on the inflation front could easily put a rate hike back on the table.

On a per capita basis, economic growth fell 1.3 per cent in the past year, the weakest per capita growth rate in 33 years. Picture: iStock

The Reserve Bank won’t rush to cut rates despite Australia’s weak economic growth.

Apart from the pandemic, annual GDP growth of 1.1 per cent for the March quarter was the worst since the recession of the early 1990s. But to some extent it was weak for the wrong reasons.

While net exports, non-residential construction and public investment detracted from the economy, it was supported by a rise in inventories plus government spending and household consumption. The latter rose 0.4 per cent in real terms despite the sharpest rise in interest rates in decades.

Growth was less than half the long-run average pace for Australia of 2.75-3 per cent and it was propped up by a high population growth rate of 2.5 per cent in the year. On a per capita basis, economic growth fell 1.3 per cent in the past year, the weakest per capita growth rate in 33 years.

Consumption was also underpinned by a rundown in the household savings rate to 0.9 per cent in the March quarter, down from a downwardly revised 1.6 per cent in the December quarter and near the lowest point in 15 years after soaring from about 5 to 24 per cent during the pandemic.

About 45 per cent of the estimated $255bn reserve now looks to have been spent, whereas previous estimates suggested only 23 per cent was spent by December, according to Westpac.

But the low savings rate shows some propensity to spend the tax cuts and cost of living relief from the federal and state budgets, potentially underpinning demand and inflation.

“The bottom line is that household spending has been more resilient than previously estimated, but now households have smaller buffers to support spending going forward,” Westpac senior economist, Matthew Hassan said.

With growth already near zero, the economy may be vulnerable to any slowdown in immigration, rise in unemployment, increase in savings or trade shock from here.

But with inflation proving sticky as consumption holds up a bit better than expected, the central bank will want to see weakness in upcoming CPI and labour force data before it stops talking about potential interest rate hikes. It will also gauge the impact of fiscal stimulus and wage increases.

“The Australian economy continued to limp forward last quarter but not for the reasons expected,” David Bassanese, chief economist at Betashares, said.

“The downside surprise wasn’t consumer spending … household spending on largely service-related areas outside of the retail sector was surprisingly firm in the quarter – which in turn may help explain the stickiness of service sector inflation so far this year.”

Essential categories like electricity, health, rent and food drove growth again this quarter, but there were also increases in some discretionary categories because of overseas travel and spending on gambling, sporting and musical events, the Australian Bureau of Statistics said.

Mr Bassanese said the surprising weakness in normally strong exports, non-residential construction and public investment that accounted for the soft GDP result last quarter “should not last”.

Exports should be underpinned by the strong rebound in tourism and international students, and ongoing growth in the global economy. Non-residential construction and public infrastructure spending should rebound given the significant pipeline of both private and public work to be done.

“In turn, that means the RBA will be relying on continued subdued consumer spending in coming quarters to keep the economy soft and inflationary pressures contained,” he warned.

“Given the tax cuts kicking in next month, there’s clear upside risks to consumer spending.”

The Budget papers revealed Treasury expects real household disposable income to rebound by 3.5 per cent next financial year, yet consumer spending is only expected to rise 2 per cent.

The government and RBA will want to see households save rather than spend much of the fiscal stimulus.

“Signs of strength in non-retail consumer spending last quarter only highlight the potential risk of a faster than expected rebound in the consumer,” Mr Bassanese said.

“Given the surprise weakness in areas likely to rebound and remain strong over the coming year, the GDP result was not as soft as it seems at first glance.

“The RBA would be concerned that consumer spending on services last quarter appeared to be quite firm, even before next month’s tax cuts kick in. While it’s still likely the RBA will keep rates on hold for much of this year, the risks of a rate hike have not gone away despite the soft GDP result.”

As with the four major banks, his base case remains that the RBA will start cutting in November.

But signs of strength in consumer spending or further disappointment on the inflation front could “easily bring a rate hike back on the table”, Mr Bassanese warned.

JPMorgan also said the household sector was stronger than previously thought.

“This is important for the RBA given the most recent minutes highlighted that the weakness in consumption was an important consideration in the decision to remain on hold, rather than hike,” JPMorgan senior economist Tom Kennedy said.

While the bigger than expected run down in savings will be a headwind to consumption from here, but the combination of tax cuts, rising real wages and dissipating policy drags “should allow a modest uptick in quarterly spending growth from mid-year”.

“We don’t think these revisions are enough to see the RBA lift rates again, but the shift in their composition skews hawkish when viewed through the lens of a stronger consumer and still elevated inflation.”

The RBA is unlikely to start cutting rates until early 2025 in his view.

“A per capita recession, while dreadful for households, isn’t terribly relevant for monetary policy,” Callam Pickering, APAC economist at Indeed, said.

“Nevertheless, the latest economic growth figures provide yet more evidence that Australia is experiencing a significant economic slowdown. We’ve been teetering on the brink of recession.

“But there are still some boxes that the RBA would like to see ticked, particularly around service sector inflation and productivity growth. And there continues to be a clear disconnect between wage growth and productivity growth that could prove problematic for inflation going forward.”