‘Higher mortgage interest costs’ slowing spending: Chalmers

This meant that the Australian economy grew by 1.5 per cent over the 2024 financial year.

Without the 0.2 percentage point contribution from new public final demand in the June quarter, however, there wouldn’t have been any growth in the economy at all.

While the June quarter figures marked the 11th consecutive quarter of GDP growth, it was the sixth consecutive quarter of GDP per capita falls (total GDP divided by the population of Australia).

Over the year, GDP per capita fell 1.0 per cent.

The figures also show that household spending fell 0.2 per cent in the quarter, following a quarterly rise of 0.6 per cent in the March quarter.

The spending data surprised many economists, as it showed that Australians not only spent less on discretionary items, particularly for events and travel, amid cost-of-living pressures, but even spending on essential items like food dropped (falling 1.0 per cent).

Savings also remained low, with households saving just 0.9 per cent of their income over the year; the lowest rate of annual saving since 2006–07.

Katherine Keenan, the head of national accounts at the ABS, said: “Excluding the COVID-19 pandemic period, annual financial year economic growth was the lowest since 1991–92 – the year that included the gradual recovery from the 1991 recession.

“Spending on many discretionary categories fell in the June quarter. This followed a relatively strong result in the March quarter, which included a number of sporting, gambling and music events.

“The strongest detractor from growth was transport services, particularly reduced air travel. This was the first fall for this series since the September 2021 quarter.”

‘Fighting inflation without smashing the economy’

Reacting to the figures, federal Treasurer Jim Chalmers said that the “really soft growth reflects the impacts of global economic uncertainty, higher interest rates and persistent but moderating inflation”.

Chalmers said: “This combination of challenges is weighing heavily on households and the data shows Australians are continuing to limit their consumption and curb spending.

“The main takeout is that consumption fell by 0.2 per cent in the quarter, with people pulling back on discretionary spending to make room for essentials,” he said, noting that the household savings ratio hit its lowest annual rate in 17 years.

“This data clearly shows the pressures people are under,” he said, adding that it “justifies” the Albanese government’s economic plan, which he said was “all about fighting inflation without smashing an economy which is already weak, and helping people doing it tough”.

“That’s why we’ve been striking a fine balance between a primary focus on fighting inflation, providing cost of living relief and managing the challenges of higher interest rates and global uncertainty.”

Chalmers reflected on how the higher interest rate environment (which has risen to curb inflation and spending) and persistent price pressures were actually “hurting people and weakening growth”.

“Higher mortgage interest costs rising as a result of higher interest rates means that households are spending less,” Chalmers said.

“Consumption fell by 0.2 per cent in the quarter. It grew just 0.5 per cent through the year to June which is about how much it usually grows in a single quarter.

“People are pulling back on spending to make room for essentials, with discretionary spending falling by 1.1 per cent in the quarter and essential spending up only 0.5 per cent.

“Higher interest rates are weighing on dwelling investment, which rose 0.1 per cent in the quarter, to be 3.0 per cent lower through the year,” the Treasurer said, also flagging that new business investment rose by 0.1 per cent in the quarter, to be 2.2 per cent higher through the year.

As a result, Chalmers said that the government was “helping people to earn more and keep more of what they earn” (such as through the stage 3 tax cuts) but concluded: “We know there’s more to do because people are still doing it tough, but we’re making substantial progress when it comes to the budget and the economy.”

What will the RBA do?

While economic growth has been slowing, inflation remains elevated.

The most recent Consumer Price Index (CPI) indicator (for the month of July), for example, revealed that the annual inflation rate is still above the central bank’s target range (2–3 per cent), at 3.5 per cent.

The annual trimmed mean movement was 3.8 per cent in July, down from 4.1 per cent in June.

Given the higher inflation, the governor of the Reserve Bank of Australia (RBA), Michele Bullock, has kiboshed any rate cuts in the near term, saying that inflation was still “too high” to warrant a drop in the 4.35 per cent cash rate in the near term (i.e. the next six months).

In a speech delivered to the Anika Foundation Fundraising Lunch today (5 September), Bullock said: "Circumstances may change, of course, and if economic conditions don’t evolve as expected, the board will respond accordingly. But if the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term."

She added: "We know the restrictive monetary policy settings that are necessary to bring inflation down are causing hardship to some households and businesses. We are very conscious of that... But inflation causes hardship too, for all Australians and particularly for the more vulnerable in our community. Our experience of how costly inflation can be is the reason that getting inflation back to the target range is our priority."

Several economists said that while the spending figures would “be a surprise for the RBA”, it would not be enough to change their mind on the cash rate.

Gareth Aird, economists at the Commonwealth Bank of Australia (CBA) said: “The RBA has taken interest rates to a restrictive setting to slow demand growth in the economy. But monetary policy cannot slow the public side of the economy. The national accounts indicate that the level of interest rates has clearly worked to slow activity in the private economy.

“The consumer is feeling the brunt of the RBA’s tightening as rising mortgage payments along with a lift in tax payable and the effects of elevated inflation have weighed on household purchasing power.

“The weakness in household expenditure leaves us with greater confidence that consumer inflation will continue to moderate.”

The CBA economics team said that the RBA would “be surprised in particular by the weakness in household consumption.”

However, it said: “The result is not enough to see the RBA commence an easing cycle given the board’s concerns around inflation, albeit softer consumption can feed into a faster decline in inflation.

“We maintain our base scenario of a November 2024 start date to the easing cycle, although the runway is shortening. From here we would need to see inflation moderate faster than the RBA is expecting and unemployment rate to lift faster. A continued modest response by households to income tax cuts would also help.”

Similarly, NAB’s economic team said: “For the RBA, growth is likely to be weaker this year than they expected at the time of the August [Statement of Monetary Policy]. The output gap is continuing to close but the RBA will need to see evidence that is translating into further easing in inflation pressures.”

However, unlike CBA, NAB continues to expect the conditions for a cut will not be in place this year.

“We expect the first cut in May, though acknowledge the risk skews to an earlier cut,” the economics team said on Wednesday.

But despite the continued warnings that the cash rate is unlikely to fall before the end of the year, several lenders have started dropping their rates out of cycle in a bid to win more home loan business.

[Related: Home lending competition ramps up]