Sluggish GDP growth cause for concern

Australian gross domestic product (GDP) rose 0.1 per cent in the March quarter 2024 and 1.1 per cent since March 2023 seasonally adjusted, according to figures released by the Australian Bureau of Statistics (ABS) on Wednesday.

Quarterly growth came in below the 0.2 per cent increase predicted by forecasters, while annual growth undershot the Reserve Bank’s expectation of a 1.3 per cent expansion.

Commenting on the data, economists agreed that the situation is dire.

Krishna Bhimavarapu, APAC economist at State Street Global Advisors, summed up the print eloquently, noting that “the economy continued to tread water in the first quarter, as it remains straightjacketed in high interest rates”.

AMP’s Shane Oliver pointed out that this is the slowest rate of annual growth since the early 1990s recession, outside of the pandemic years.

“To put this figure into context, population growth over the last year was running at more than double that pace at 2.5 per cent; and a long run average growth rate for Australia is around 2.75–3 per cent,” the chief economist said.

“In other words, living standard as measured by GDP per person have gone backwards, falling for the fifth consecutive quarter, or -1.3 per cent over the year, which is also the worst decline since the early 1990s, outside of the pandemic.”

CBA’s Gareth Aird offered a similar sentiment, noting that while the economic pie is “still expanding modestly”, the average size of the slice of pie that each Australian has received over the past five quarters has progressively shrunk.

“The slowdown in GDP growth is by design and not default. The economy ran too hot coming out of the pandemic and was operating above its capacity. But that picture has changed,” Aird said.

“More specifically, we believe the positive output gap has now closed and a negative output gap will slowly emerge over the remainder of 2024 and into 2025.”

VanEck’s portfolio manager, Cameron McCormack, added that the weaker-than-expected GDP print is a “red flag” for the government.

“This may prompt political pressure on the RBA to release its grip on the cash rate and implement rate cuts sooner than expected.”

Weakest growth in years

Taking into account the pandemic years, the economy experienced its lowest “through the year growth” since December 2020.

GDP per capita fell for the fifth consecutive quarter, dropping 0.4 per cent in March and 1.3 per cent through the year.

Government final consumption expenditure rose 1.0 per cent in March, driven by government benefits, as the federal government increased spending on medical services and some state governments provided energy bill relief payments.

Household spending rose 0.4 per cent in the March quarter, held up by essential categories like electricity, health, rent and food, while some discretionary categories also experienced a boost driven by overseas travel and other recreation-related spending.

Total capital investment slumped 0.9 per cent, with private investment falling 0.8 per cent supported by a large 4 per cent drop in non-residential building construction.

Residential investment remained very lacklustre, falling for the third consecutive quarter at a 0.5 per cent quarter-on-quarter or 3.4 per cent year-on-year pace, confirming that restrictive monetary policy is weighing on new residential construction.

Public capital investment also suffered a setback, driven by reduced state and local public sector investment.

However, the ABS assured that the level of overall investment remained high and continued to exceed mining investment boom levels seen in the early 2010s.

Meanwhile, offsetting the 0.7 percentage point contribution to the GDP made by the build-up in inventories, net trade detracted 0.9 percentage points from GDP growth, with stronger imports (+5.1 per cent) than exports (+0.7 per cent).

Economists divided on rates

“Had it not been for inventories, growth would have contracted,” said Bhimavarapu.

Turning to how this data may influence the RBA, the economist said, “Australia does not need higher rates”.

“This is why we believe the next RBA move should be a cut and view a hike as an outright policy mistake,” Bhimavarapu said.

“We expect two rate cuts this year and three in 2025, to a terminal policy rate of 3.10 per cent. Nonetheless, we only expect the first cut to be delivered in September, as the RBA will still be one of the last major central banks to cut rates.”

Acknowledging that the GDP data is a delayed series and is not a forward-looking signal for the economy, Oliver conceded that it is still “the most comprehensive snapshot of the Australian consumers, government spending, and businesses”.

“In March 2024, households were clearly still burdened by high taxes, inflation, and rising mortgage payments which translated to declining savings rate and low discretionary spending which we have seen in the past year,” the chief economist said.

“Coupled with further signs of weakness in the labour market – evidenced by declining hours worked and the wages bill in this release, we continue to think that there will be scope for a rate cut later this year, as slowing economic growth leads to lower inflation and the RBA attempts to walk the fine line of avoiding a recession in Australia.”

McCormack, on the other hand, encouraged the RBA to “stay the course”.

“The reality is that inflation has re-accelerated and persistent services inflation remains unresolved. Given Australia’s near-full employment levels, the RBA has the headroom to maintain higher interest rates for that final stretch to tackle the bigger problem of elevated inflation,” he said.

Moreover, he explained that Australia’s low productivity, combined with high wages across both the public and private sectors, is “representative of an economy that’s limping along as it struggles with the burden of elevated inflation”.

“VanEck maintains its view that there is a growing likelihood that the next RBA move will be up rather than down,” McCormack noted, adding that the stage three tax cuts, rolling out come July, will soon be “padding consumer pockets” and potentially leading to “an escalation” in spending.

Aird disagreed, noting that the CBA doesn’t expect the tax cuts to “shift the needle materially from a consumption perspective”.

“Private surveys suggests that the bulk of households intend to save rather than spend their tax cut. And the tax relief is not a lump-sum payment, but rather an adjustment in after-tax take-home pay.”

As such, the CBA expects the RBA to leave policy on hold in June and to heed the second quarter CPI print ahead of its August board decision.

“At this stage, our forecast for trimmed mean inflation in Q2 24 is 0.8–0.9 per cent. We believe such an outcome would be sufficient for the RBA to leave the cash rate on hold,” Aird said, but cautioned that stronger core print would test the RBA’s resolve to not tighten policy further.

On the proviso that labour market data continues to loosen and inflation continues to cool, the CBA anticipates the RBA can commence an easing cycle by late 2024.

“Given the challenging inflation backdrop, the risk to our call is increasingly moving towards a later start date for an easing cycle,” Aird concluded.