Australian Economy Surprisingly Slows as High Rates Dampen Spending
Australia’s economy unexpectedly slowed sharply in the three months through September as consumers hunkered down in the face of rising borrowing costs while trade detracted from growth. The latest data from the Australian Bureau of Statistics (ABS) showed that gross domestic product (GDP) advanced by only 0.2 per cent from the prior quarter, falling short of economists’ estimates of a 0.5 per cent gain.
One of the key factors behind the sluggish growth was the reluctance of consumers to spend due to rising interest rates. ABS head of National Accounts Katherine Keenan noted that household spending was flat in the September quarter, while government spending and capital investment were the main drivers of GDP growth.
The Reserve Bank of Australia (RBA) had implemented 4.25 percentage points of rate hikes since May 2022, which are expected to contribute to a further slowdown in the economy. The RBA forecasts a growth rate of 1.5 per cent by the end of 2023, followed by a modest pickup to 2 per cent in late 2024.
Bloomberg Economics also expects growth to remain subdued as higher interest rates dampen household demand and housing-related activity. In fact, recent data showed that Australian households are already facing a squeeze, with the savings ratio declining to the lowest level since 2007. This decline, coupled with the eighth consecutive quarterly decline in the savings ratio, reflects the challenges faced by households.
Despite the cautious approach of the RBA, economists still predict a 40 per cent probability of a recession within the next year. AMP chief economist Shane Oliver expressed concerns that the RBA may have tightened policy more than necessary, increasing the risk of a recession in the coming year. This sentiment is fueled by various indicators pointing to a decline in consumer spending, a key driver of the Australian economy.
While most economists believe that the RBA has completed its tightening campaign, there is still potential for another rate hike in early 2024. In contrast, global financial markets anticipate easing measures from the United States Federal Reserve in 2024, as well as potential rate cuts in Europe, New Zealand, and Britain.
In response to the slowdown in Australia’s economy, Treasurer Jim Chalmers expressed empathy for households under financial pressure. He acknowledged the high cost of living and the burden of higher interest rates, which are contributing to the challenges faced by Australian households.
Overall, the unexpected slowdown in Australia’s economy reflects the impact of rising interest rates on consumer spending, coupled with challenges in trade. The concerns regarding a potential recession and the cautious approach of the RBA highlight the need for careful monitoring of the economic situation in the coming months.
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