Next rates move could be down as economy ‘hits the wall’ in the September quarter

Household spending collapsed in the September quarter amid soaring interest payments and the heaviest tax burden in history.

Jim Chalmers said Treasury would update its growth forecasts in next week’s mid-year budget, but said “this softening in household consumption isn’t surprising”. Picture: NCA NewsWire / Gary Ramage

The Australian economy “hit the wall” in the three months to September, as household spending collapsed under the weight of cost-of-living pressures, soaring interest payments and the heaviest tax burden in history.

National accounts figures showed real GDP growth halved to just 0.2 per cent in the most recent quarter, well below the consensus forecast for a 0.5 per cent lift, prompting financial markets to price out any chance of higher interest rates and instead bet on a Reserve Bank cut by next September.

As financial pressures build on families, Thursday’s Australian Bureau of Statistics data revealed consumption stalled in the quarter.

The household savings ratio plunged in September to 1.1 per cent, from 2.8 per cent in June and to its lowest level since 2007.

Jim Chalmers said Treasury would update its growth forecasts in next week’s mid-year budget update but the Treasurer said “this softening in household consumption isn’t surprising”.

“The Australian economy is slowing in expected ways as an inevitable consequence of higher interest rates and global economic uncertainty,” Dr Chalmers said.

“Our economy is resilient in parts, but we know that these are hard times for a lot of Australians.”

A surge in net migration masked an even weaker economic performance.

Adjusting for population growth, the economy in per-capita terms contracted by a sharp 0.5 per cent in September, and has not increased for three straight quarters, the ABS figures showed.

Westpac senior economist Andrew Hanlan said the national economy “hit the wall in the September quarter”.

“The intense headwinds of high inflation, sharply higher interest and additional tax obligations are having a significant impact, leading to a sharp decline in real household disposable income,” Mr Hanlan said.

“Overall, the update is a bleak one for households.”

Trade was a drag on growth through the September quarter. Picture: NCA NewsWire / Andrew Henshaw

With unemployment remaining near 50-year lows, there was a solid 2.5 per cent increase in employee compensation in the September quarter, as more people found jobs and worked for higher wages.

But that was overwhelmed by a 7.6 per cent jump in income taxes following the end of the Low and Middle Income Tax Offset, the ABS said, and as bracket creep ate up more of workers’ pay packets.

Income tax, net of government benefits, pushed to a record 14.4 per cent as a share of household gross disposable income, from a pre-pandemic level of about 8 per cent.

The squeeze on family budgets from higher interest rates was also evident, as mortgage interest payments jumped by 7.6 per cent despite no Reserve Bank hikes in the quarter, with borrowers moving off cheap fixed-rate loans.

That left real household disposable income down by 1.7 per cent over the three months to September, the fourth straight quarterly decline, and a record 5.6 per cent lower in the year.

CBA head of Australian economics Gareth Aird said more up-to-date data suggested the economy was weaker again in the December quarter, and there was now a “clear risk” that the economy would contract over the final three months of the year.

“Against this backdrop, it is no wonder that consumer sentiment has been at levels consistent with a major negative economic shock for over a year,” Mr Aird said.

EY chief economist Cherelle Murphy said the national accounts were “not an attractive set of numbers, because you have this slowdown in the economy, but still have persistent price pressures”.

Ms Murphy noted the economy would have stalled in the quarter were it not for the solid lift in government spending.

“There’s no doubt that interest rate rises are bringing down growth, and that probably means the RBA will, on balance, feel more comfortable leaving rates on hold next year. But it’s not a definitive case,” she said.

Ms Murphy said there were conflicting messages in the data, not least the jump in international travel that suggested a substantial number of households were not feeling as acutely the impact of rate hikes and high cost of living.

More welcome was a 0.9 per cent lift in labour productivity in the quarter – the first increase in a year.

But the result would have provided cold comfort to the RBA, as unit labour costs – which the central bank has said have the closest relationship to inflation over the time – jumped by 2.2 per cent in the quarter, to be 6.4 per cent higher in the year.

Citi chief economist Josh Williamson said “the bottom line is that productivity growth remains below where it needs to be to allow wages growth to be consistent with sustainable inflation outcomes”.