WEEKLY E-MAIL

9 September 2024

NO GROWTH AND NO CONSUMPTION – INTEREST RATES TAKE A BIT OUT OF SPENDING

By James Malliaros

The national accounts released by the Australian Bureau of Statistics last Wednesday for the June quarter revealed that the Australian economy is crawling, with households consuming less and also saving less. The data paints a portrait of a country groaning under the cost-of-living pressures and high interest rates.

Quarterly gross domestic product (GDP) rose by just 0.2% for the third consecutive quarter, leaving annual growth at 1.0%. Excluding the COVID-19 pandemic period, this was the lowest since 1991/92, the year that included the gradual recovery from the 1991 recession.

Although the Australian economy grew for the eleventh consecutive quarter, GDP per capita was down for the sixth consecutive quarter (-0.4%), as a result of a 2.5% population growth for the year. This means that consumers and businesses have been bringing in less income, producing less and spending less for the year and half to June. Not a great result for the economy.

The major takeaways from the GDP figures are:

Households are going backwards again

Household expenditure fell by 0.2% over the quarter, leaving it up only 0.5% on the year. Each person is buying 2.0% less of goods and services than a year ago, resulting in real retail spending going backwards for almost two years now.

Households are barely saving anything

Despite slashing their spending, households aren’t managing to save either. The savings to income ratio has been sitting at 0.6% for the last 6 months, one of the lowest figures since the global financial crisis.

With the cash rate sitting at a 12-year-high, unmoved since November 2023 despite concerns over a flatlining economy, Australians are likely spending a disproportionate amount of their income servicing their home loans. Over the past year, the average mortgage has risen by 9.3%, with around 13.0% of households reporting missing one or more mortgage repayments over the past six months.

Government spending remains strong despite government investment tapering off

Government expenditure contributed 0.3% to GDP, government investment 0.1%, while government spending rose by a strong 1.4%. The main driver is social benefit programs for health services (largely the NDIS). State governments are also major drivers of growth, although this has added to some inflationary effects in the economy.

Australia’s commodity boom is waning (negative for GDP) but remains historically strong

Australia’s terms of trade, the prices we receive for our exports versus what we pay for our imports, fell 3.0% in the quarter.

Import prices were flat but export prices, dominated by bulk commodities such as iron ore and coal, fell 3.0%. It is down 6.4% from a year ago.

On a more positive note, service exports are growing strongly again, up 5.6% for the quarter, though recent Federal Government overseas student policy announcements may dampen this in the future.

What the GDP figures show is that Australia’s private sector has effectively ground to a halt, with only government spending keeping economic growth in positive territory. This is not a sustainable position and shows that higher interest rates have done their job in slowing the economy.

For the first time since the inflation boom of 2022, incomes are increasing faster than inflation (leading to real wages growth). Going forward, what really matters most is how households utilise the Stage 3 tax cuts and the many government cost of living handouts which started landing in bank accounts in July.

In addition, the direction of interest rates is an important narrative for Australian households. September quarter GDP results will be released in early December, with the Reserve Bank board meeting soon after to decide on interest rates – financial markets put the chance of a rate cut at 80% given the state of the local economy. This will certainly provide some relief to consumers and mortgage holders if the RBA comes to the party.

Despite the weaker than expected figures, there are still some green shoots. The economy has likely reached the bottom of the trough, while interest rates have now clearly peaked. The figures show that the economic discussion in Australia now needs to shift toward encouraging business investment, productivity and growth.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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