Australia economy slows to a crawl in Q1, grows 0.1% q/q

The Australian economy experienced a significant slowdown in the first quarter of the year, primarily due to high borrowing costs and persistent inflation. This led to a decrease in consumer spending, despite the unlikely prospect of interest rate relief in the near future.

According to data released by the Australian Bureau of Statistics, the country’s real gross domestic product (GDP) only grew by 0.1% in the first quarter, falling slightly below market expectations of 0.2%.

Furthermore, annual growth dropped to 1.1%, down from 1.5% in the previous quarter. This represents the slowest pace of growth in three decades, excluding the impact of the pandemic.

Household spending, which accounts for half of GDP, experienced minimal growth at 1.3%. However, this growth was primarily driven by essential items such as electricity and healthcare, while discretionary spending remained almost stagnant throughout the year.

The report also highlighted concerning news regarding future spending power, as the savings rate plummeted to a historically low 0.9% following significant downward revisions to past figures.
Marcel Thieliant, the head of Asia-Pacific economics at Capital Economics, highlighted the significant pressure that households have been facing due to the increase in living costs, interest payments, and taxes. This is evident from the fact that the savings rate was around 5% before the pandemic. He also mentioned that despite the stagnation of real incomes in the last quarter, this pressure has not yet completely diminished.

Although financial markets have already accounted for the possibility of the Reserve Bank of Australia (RBA) not raising its 4.35% cash rate, they also do not anticipate a cut in the near future. Futures contracts indicate a 50-50 probability of a rate move in December and do not fully expect a cut to 4.10% until May next year.

Before the release of the data, RBA Governor Michele Bullock acknowledged that the economy was “very, very weak.” However, she emphasized the need for restrictive policies to align demand with supply and control inflation.
According to the latest monthly report on consumer price inflation, there was an unexpected increase to 3.6% in April. This rise can be attributed to a general increase in costs across various sectors such as food, health, clothing, and travel.

Inflation measures in the GDP report also showed higher figures, with domestic demand inflation reaching 4.6% for the year.

This inflationary environment has had a positive impact on nominal GDP, which grew by 3.5% in the year leading up to March. In terms of current dollars, Australia’s GDP reached A$2.6 trillion ($1.73 trillion) in the year, equating to A$98,224 for each of the country’s 26.8 million individuals.

However, when inflation is taken into account, per capita GDP actually declined by 0.4% in the quarter and experienced a significant drop of 1.3% compared to the previous year.

This decline in per capita GDP can be attributed to the rapid increase in migration, which has boosted annual population growth to 2.5%, double the average of the past three decades.
The housing market is experiencing increased pressure due to the influx of foreign workers and students, causing rents to reach unprecedented levels. As a response, the Labor government has made a commitment to implement limits on future immigration. (Exchange rate: $1 = 1.5015 Australian dollars)