(Bloomberg) -- Australia’s economy powered ahead in the three months through June, underscoring the strong momentum the Reserve Bank has highlighted as it delivered a series of rapid interest rate increases.
The A$2.2 trillion ($1.5 trillion) economy expanded 0.9% from the first quarter, buoyed by household spending and high export prices, government data showed Wednesday. That drove annual growth to 3.6% -- well above the pre-pandemic average of around 2%.
For the central bank, the data validate its hawkish approach to tackling inflation, having hiked by a half percentage point Tuesday to take the cash rate to 2.35%. Policy makers are relying on Australians to keep running down their savings to fund consumption in the face of surging prices and rising borrowing costs.
“These GDP figures confirm that demand across the economy remains high,” said Callam Pickering, an economist at global job portal Indeed Inc. “Households are spending in record numbers, contributing to the imbalance between demand and supply, which necessitates tighter monetary policy.”
Australia has been a rare beneficiary of Russia’s ongoing war on Ukraine that has sent energy and commodity prices soaring. Treasurer Jim Chalmers warned today that the economy couldn’t keep relying on the export boom.
Policy makers expect GDP growth to decelerate next year to less than 2% as higher interest rates weigh on demand. A key pillar of support remains a very tight labor market, with unemployment near a 50-year low of 3.4% and predicted to fall further in the months ahead.
RBA Governor Philip Lowe has raised rates by 2.25 percentage points since he began the current tightening cycle in May, when borrowing costs were at a record-low 0.1%. He’s trying to get a handle on the fastest inflation Australia has experienced since the early 1990s.
Money markets are pricing in Australia’s rate to hit 3.2% by year’s end, from 2.35% now, and peak at 3.75% in 2023. That’s well above the RBA’s estimate of the neutral rate -- a level that’s neither expansionary nor contractionary -- at around 2.5%.
Today’s data showed the savings rate fell for a third consecutive quarter to 8.7% as Australians tap cash built up during the pandemic.
What Bloomberg Economics Says...
“Resurgent spending has returned the household savings rate to pre-pandemic levels, which is likely to moderate consumption growth going forward as consumers combat elevated prices.”
-- James McIntyre, economist
For the full note, click here
Economists forecast Lowe will shortly slow the pace of rate increase to quarter-point moves after four successive half-point hikes. The governor will deliver a set-piece address Thursday titled “Inflation and the Monetary Policy Framework” and RBA watchers are looking to it for clues on the policy path ahead.
Chalmers, speaking to reporters in Canberra, highlighted the challenges confronting the economy from falling real wages to soaring inflation. He pledged next month’s budget would offer cost of living relief including to childcare, saying such measures would also provide an economic dividend through improved productivity.
Our role is not to “make the job of the independent Reserve Bank harder,” he said, implying the government would try to avoid adding to aggregate demand.
Todays GDP report also showed:
- Household spending surged 2.2% and added 1.1 percentage points to GDP growth
- Exports jumped 5.5% to also contribute 1.1 points
- Inventories subtracted 1.2 points from GDP
- Government spending fell 0.8%, cutting 0.2 percentage point
- Non-dwelling construction dropped 5%, also shaving 0.2 point
- Machinery and equipment advanced 4%, adding 0.2 point
“Conditions for consumers and businesses are likely to be tougher in the second half of the year, as interest rates rise and commodity prices come off their peaks,” said Cherelle Murphy, chief economist at EY.
(Updates comment from economist and charts.)
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