The Economy of Australia Slows to a Crawl, and Consumer Spending is Surprisingly Weak

The economy of Australia barely grew in the third quarter because exports fell and households were reluctant to spend because of an increase in mortgage payments. This suggests that rate hikes were working to reduce demand.

In comparison to the previous quarter, real gross domestic product (GDP) increased by 0.2% in July-September, marking the eighth consecutive quarter of growth despite being at its slowest level in a year. That was lower than anticipated by 0.4%, which supports the argument that the Reserve Bank of Australia does not need to tighten.

According to data released on Wednesday by the Australian Bureau of Statistics, annual GDP growth was 2.1%, which was little different from the previous quarter.

“Australia’s economy hit the stopping point in the September quarter,” said Andrew Hanlan, a financial specialist at Westpac, adding it was astounding to see exactly the way that frail customer spending was during the quarter.

“A sharp decline in real household disposable income is being caused by the intense headwinds of high inflation, sharply higher interest rates, and additional tax obligations.”

In fact, household spending remained flat from quarter to quarter and barely increased for four consecutive quarters, the worst stretch since the global financial crisis.

After a tax offset program expired, income tax paid increased by 23% from last year, and mortgage payments increased by 71% as more people switched from fixed-rate mortgages to higher variable rates.

That pushed the family investment funds proportion to drop further to 1.1%, its lowest level starting around 2007.

The Reserve Bank of Australia believes that the slowdown is a necessary side effect of tightening monetary policy so that inflation can return to its target range of 2 to 3 percent. In October, inflation was 4.9%.