Australia's Slowing GDP Growth Pushes Rate Cut Expectations Forward

Australia's economy grew at its slowest annual pace since the pandemic in the third quarter, disappointing expectations for a rebound and prompting a significant shift in market forecasts for interest rate cuts, reports Reuters.

The Australian Bureau of Statistics (ABS) revealed on Wednesday that real gross domestic product (GDP) rose by just 0.3% in the September quarter, falling short of market forecasts of 0.4%. Annual growth slowed to 0.8%, down from 1.0% in the previous quarter and significantly below expectations of 1.1%. This marks the slowest annual growth since late 2020.

The underwhelming result prompted a sharp reaction from investors, sending the Australian dollar down 0.7% to $0.6442. Markets swiftly adjusted their expectations for rate cuts, with the probability of a cut in April rising to 96%, up from 73% before the data release. Expectations for a May rate cut also increased.

The Reserve Bank of Australia (RBA) had previously anticipated a stronger economic recovery by year-end, driven by tax cuts and increased consumer confidence. However, the weak third-quarter GDP data casts doubt on this outlook.

"Put it together on balance, the weak GDP numbers argue for an earlier rather than later cut," said Shane Oliver, chief economist at AMP, to Reuters. Oliver is predicting a rate cut in May. Another economist stated that "The weakness we're seeing in the economy, particularly the private sector of the economy, just indicates that there's still a high chance that we could get a cut in February."

The ABS highlighted that the modest expansion was primarily fueled by public sector spending, which contributed 0.6 percentage points to growth. Household spending, representing half of GDP, remained stagnant.

Treasurer Jim Chalmers described the GDP growth as weak and below historical averages. "Our economy is still growing but very slowly. It's weighed down by interest rates and cost of living pressures and the global economic uncertainties as well," Chalmers stated.

The RBA has maintained interest rates at a 12-year high of 4.35% for the past year. The weak GDP figures suggest that the current monetary policy is effectively dampening demand. While the RBA anticipated increased consumer spending in response to tax cuts and slowing inflation, consumers remain cautious despite a 1.5% increase in disposable income during the quarter.

Despite the overall weakness in GDP growth, some positive indicators emerged. Retail sales rose for a third consecutive month in October, and anecdotal evidence from Black Friday sales suggests this momentum may have continued into November. Inflation also showed further signs of moderation, with the GDP chain price index falling to 2.4% in the last quarter.

"We expect GDP growth will slowly pick up in the coming quarters... But this improvement will be unspectacular, with the economy set to endure below trend growth in the near term while capacity constraints continue to bite," said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia. However, the decline in productivity by 0.5% in the quarter presents a challenge to the RBA's inflation forecasts.