Australian consumers may be down, but not out

Weak consumer spending accounted for much of why the commodity-rich economy grew at its slowest pace in more than 30 years.

After withstanding the equivalent of 17 interest-rate increases in less than two years, the biggest jump in living costs in more than four decades, and a surge in income tax payments, Australian consumers were understandably dazed and bruised in the second quarter.

Weak consumer spending accounted for much of why the commodity-rich economy grew at its slowest pace in more than 30 years through the quarter, excluding the pandemic years.

The second quarter recorded the most significant decline in household spending since the 2008 financial crisis, even as immigration surged.

“To get your head around that … we saw around the same growth [in consumer spending] in the year as we usually see in a single quarter,” Treasurer Jim Chalmers told reporters after the release of the economic growth data on Wednesday.

Had it not been for a rise in government spending, the economy would have contracted in the second quarter instead of growing by 0.2 per cent, fanning gloomy headlines of coming recession and the imminent threat of higher unemployment.

Add in the recent volatility in global markets and fears linked to conflicts dotting the globe, and it’s clear that Australian consumers are trying to make every cent count.

But if that’s the case then the Reserve Bank of Australia should be rushing to join the growing herd of major central banks lowering interest rates.

It might just be that the second quarter could be the Australian economy’s darkest hour before the dawn, and consumers are set to rally.

Economists and the RBA are expecting consumers to stagger back to their feet over the coming quarters, pinning their hopes on cost-of-living relief.

The federal government delivered income tax cuts to all workers on July 1, while also announcing rebates to help offset rising rents and electricity costs. Direct cash handouts to households were also part of a bid to ease the surge in living costs.

The measures might be enough to revive consumer spending.

Sally Auld, chief investment officer at JBWere, said that while the RBA’s forecasts for spending will now have a lower starting point, the trajectory from here is still likely to go upward.

“The RBA’s forecasts envisage a pick-up in GDP growth from here so we need to see that start to manifest in some of the partial data in the months ahead,” she said. “Let’s see what happens before we start rushing to make predictions.”

Catherine Birch, senior economist at ANZ, said she doesn’t expect the weak growth report to materially shift the RBA’s cautious narrative around interest rates.

The RBA’s governor, Michele Bullock, last month ruled out near-term interest-rate cuts, citing lingering fears about elevated inflation.

“The income tax cuts and cost-of-living relief measures will materially boost household disposable income in the third quarter, which should see a gradual lift in household spending growth,” Birch said.

Joshua Williamson, chief economist at Citi Australia, said “GDP growth could be close to troughing, with consumer spending looking brighter in the second half of the year.”

He also expects government spending to rise further thanks to a number of coming state elections, with the federal government also set to announce spending on key industry initiatives.

Citi is sticking with its view that an interest-rate cut will be delayed until next year, potentially as late as May.

The RBA can sit pat for now.