Janice R. Andrews
It’s still a slow economy in Australia because people aren’t spending as much money. This is because of high interest rates on loans and ongoing inflation. The country’s Gross Domestic Product (GDP) grew by a small 0.2% in the second quarter of 2024, which was in line with what experts thought would happen. But the yearly growth rate slowed to 1%, which is the slowest rate since the slump in the 1990s (not counting the COVID-19 pandemic).
Based on economic data, the current monetary policy, which is marked by high interest rates, seems to be strict enough to stop inflation. This is why the financial markets are still sure that the Reserve Bank of Australia (RBA) will start cutting rates in December. The stable Australian dollar and falling yield on three-year government bonds, which are very sensitive to changes in interest rates, show that this is what people think will happen.
Alex Joiner, head economist at IFM Investors, said, “This slow growth is the price we have to pay to get inflation under control.” He also said that because the RBA is likely to keep its current policy stance for the rest of the year, there is a chance that the economy may not grow as much in the second half of 2024 as some had thought.
The RBA thinks that the June quarter will be the lowest point of the current economic slowdown. They expect yearly growth to pick up to 1.7% by the end of the year and then rise to 2.5% by late 2025. But this prediction comes at a time when yearly GDP growth has slowed a lot from its average of 2.4% over the past ten years. The rapid rate hikes by the central bank in 2022 and 2023, which were meant to control inflation, were a major cause of this slowdown. The cash rate is at a 12-year high of 4.35% right now, and RBA officials have said they don’t plan to cut it any time soon.
It was recently stressed by Governor Michele Bullock that it is too early to think about loosening monetary policy. Deputy Governor Andrew Hauser agreed, pointing out that inflation is still higher in Australia than in places like the US. The country’s slow economic growth makes it harder for the RBA to keep prices in check. The most recent data showed that GDP per hour worked went down even more. This is a worrying sign for lawmakers who see productivity growth as important for raising living standards and backing wage rises that will last.
Andrew Canobi, a fixed income director at Franklin Templeton, said, “Growth isn’t very strong.” “Australia can’t get out of its low productivity and high costs rut.” Interest rates will likely stay high for a long time because of the way things are right now.
Most economists think that the RBA will start lowering interest rates in February 2025, but the process will likely be slow. Other big central banks, like the Federal Reserve, are already beginning to loosen up.
More bad news for the economy is that the family savings rate stayed low at 0.6% in the second quarter, down a lot from its high point of 24.1% in June 2020. This shows that Australian families don’t have a lot of extra money. This is one reason why household spending fell by 0.2% during the same time period, which cut 0.1 percentage points off of GDP growth.
Katherine Keenan, head of National Accounts at the Australian Bureau of Statistics, said that fewer transportation services, especially flights, were holding back growth the most. This was the first drop in this sector since September 2021.
Bloomberg Economics experts think that growth will remain slow, especially in areas that are affected by interest rates. They also think that GDP will likely keep shrinking per person throughout the second half of 2024 as the effects of tight monetary policy continue to be felt.
