Economy expands at a solid pace
Australia’s economy grew 0.8 per cent in the December quarter according to the Australian Bureau of Statistics latest report, with annual growth accelerating to 2.6 per cent.
Commonwealth Bank economists say this pace means the economy is running “above its speed limit”, which, in simple terms, means it’s growing faster than it comfortably can without pushing prices higher.
"This result shows the Australian economy is still running hot, even as households face tighter conditions,” Commonwealth Bank Head of Australian Economics Belinda Allen said.
“Inflation is still too high, and the strength in economic activity will keep the Reserve Bank watching closely.”
Most parts of the economy contributed to the growth recorded in the latest reading, including business investment, home building, government spending and businesses restocking their shelves. Overseas trade, however, pulled growth down slightly, which economists had expected.
Household spending weaker than expected
The biggest surprise in the national accounts was household spending, a measure of how much Australian consumers are buying. It rose just 0.3 per cent over the quarter, which was weaker than forecast. People spent less on cars, electricity and tobacco, which held back the overall figure.
Electricity and tobacco were both affected by one‑off rebates and technical measurement changes, and if those categories were excluded, household spending increased by a stronger 0.6 per cent.
At the same time, real disposable income (the income households have left after tax, interest costs and inflation) rose 0.9 per cent. That helped lift the household saving rate to 6.9 per cent, the highest since late 2022.
This means households may have a little more buffer to manage cost of living pressures, but it could also mean they’re less responsive to future interest rate rises, Allen said.
Productivity improves, easing pressure on costs
The latest data also showed positive signs for productivity, essentially a measure of how much output in goods and services is generated for each hour worked. Productivity was flat in the quarter but up 1 per cent over the year, and 1.5 per cent in the market sector (excludes education, health care and public administration).
Unit labour costs, a key measure of how expensive it is for businesses to employ workers per unit of output, also slowed. That can help reduce inflation pressure if the trend continues.
What this means for the Reserve Bank of Australia
Today’s figures complete the major data set ahead of the Reserve Bank of Australia (RBA) meeting on 16 and 17 March.
The unemployment rate remains at 4.1 per cent and inflation is broadly tracking in line with expectations but is too high.
Allen says the softer household consumption result likely reduces pressure for a March rate increase, particularly given heightened uncertainty from the conflict in Iran. Market pricing for a March move eased following the GDP release.
CBA economists still expect the RBA to hold in March and raise the cash rate in May, though they note the debate will be “lively”.
Dependent on the duration and severity of global tensions, the risk remains that the RBA may need to lean further against inflation and domestic demand. The central bank remains data dependent, watching inflation expectations, household spending and labour market conditions closely.
See the economists’ full report HERE.
