(Bloomberg) – Australia’s economy grew more slowly than expected in the three months to September as imports surged, reflecting continued strength in household spending and resilience to rate hikes by the Reserve Bank.
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Gross domestic product rose 0.6%, up from 0.9% in the second quarter and just below economists’ estimate of 0.7%, official data showed on Wednesday. Compared to the previous year, the economy grew by 5.9% compared to the forecast 6.3%. That was still stronger than the five-year compound annual GDP growth of 4.2% before the pandemic.
The slower than forecast result caused Australian 3-year government bond yields to fall by as much as 3 basis points immediately after the data, before reversing the move. They were trading at 3.07% in Sydney as of 12:12 p.m.
Today’s data is a snapshot of the economy in the rear-view mirror and encompasses a period when the RBA implemented a series of half-a-point rate hikes to counter rising consumer prices. GDP was supported by consumption as Australians amassed more than A$200 billion ($135 billion) in savings during the pandemic.
“Spending on discretionary items rose at a healthy pace, although momentum has slowed as the sugar slump eased as the economy reopened,” Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics.
“Higher interest rates and price inflation will continue to dampen spending growth in the coming quarters,” he said. “The scope for consumers to finance consumption growth through savings is rapidly disappearing.”
Today’s release showed that the household saving rate fell to 6.9% in the third quarter from 8.3% three months earlier.
For the RBA, the report confirms its decision to slow the pace of monetary tightening in October after making four consecutive quarter-point hikes from June to September.
The central bank has hiked 3 percentage points since May to take interest rates to a 10-year high of 3.1% as it tries to rein in inflation, which is expected to hit 8% in the current quarter.
The money markets are pricing in a key interest rate of 3.6% until mid-2023, which is also in line with the median estimate of economists. However, most observers believe the economy will continue to grow, albeit at a slower pace. This contrasts with growing fears of a recession in the US and other advanced economies.
“A sharp slowdown is on the cards for 2023 as high inflation and rising interest rates take hold,” said Andrew Hanlan, senior economist at Westpac Banking Corp. “There is already some evidence of the adverse impact of these strong headwinds — particularly weak retail sales.”
Last week’s figures showed that October retail sales fell for the first time this year. Consumer sentiment is in the doldrums and business confidence is also falling. Prices of Australia’s main exports – iron ore, coal and gas – have also fallen from very high levels.
A fading boost from Australia’s reopening this year, rising services imports as holidaymakers travel abroad and an expected slowdown in consumption in a high-inflation environment are likely to limit growth in the period ahead, economists say.
Gov. Philip Lowe has expressed confidence that the economy can avoid a recession despite the RBA conducting its sharpest annual tightening since 1989 and higher borrowing costs.
Still, unemployment is expected to remain below 4% through 2024 from a recent 48-year low of 3.4%.
Today’s GDP report also showed:
Household consumption increased by 1.1% in the last quarter, adding 0.6 percentage points to GDP
Non-residential construction increased by 8.6%, adding 0.4 points to GDP
The cost of transferring ownership when buying or selling houses fell 11.2%, detracting from GDP by 0.2 points
Imports fell 0.8 points from GDP, reflecting an increase in consumption in the economy
–Assisted by Tomoko Sato.
(Updates with commentary from economist and chart.)
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