Australia’s Economy Slows as Households Save Extra Cash

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Australia's economy slowed last quarter as interest-rate cuts and government tax rebates failed to spur household spending, reinforcing expectations the central bank will need to resume easing next year.

Gross domestic product advanced 0.4% from the second quarter, when it rose an upwardly revised 0.6%, the statistics bureau said in Sydney Wednesday. Economists forecast 0.5% for the three months through September. From a year earlier, GDP gained 1.7%, in line with estimates.

The report comes a day after the Reserve Bank held interest rates at 0.75% following three cuts since June to try to revive consumption and rekindle economic growth. The Australian dollar traded lower after the data and was at 68.35 U.S. cents at 12:24 p.m. in Sydney.

Governor Philip Lowe said lower rates are boosting property and should in time lead to higher household spending and residential construction. So far, the impact of Lowe's stimulus has come mainly through housing: national property values jumped 1.7% last month, the largest gain since 2003.

“The Australian economy appears to have reached a gentle turning point,” the governor said Tuesday.

What Bloomberg's Economists Say

“The 3Q GDP outcome is disappointing, particularly consumer spending as households seemingly absorbed tax cuts and interest rate reductions.”

“Weak demand is concentrated in the private sector, which is now in technical recession thanks to a per capita contraction in consumer spending, slumping residential construction activity, and weak business investment.”

“The economy's “gentle turning point” needs to be a little less gentle.”

James McIntyre, economist

Today's report showed:

• Government spending and exports were among the biggest contributors to growth
• Dwelling construction detracted from the expansion, as did machinery and equipment; household spending slowed to an anemic 0.1% increase from the previous quarter
• The savings ratio jumped to 4.8% in the third quarter from an upwardly revised 2.7% in the prior three months

Australia's exporters are benefiting from a 16% drop in the Aussie dollar since early last year and miners are reaping windfalls as China ramps up steel production -- boosting demand for iron ore -- as it seeks to offset trade losses. That has helped produce Australia's first back-to-back current-account surpluses in 46 years.

Lowe last week set out the central bank's policy options ahead, suggesting it has two more conventional cuts available before reaching the effective lower bound for rates. At that point, QE would become a possibility, although the governor insists this is unlikely.

Prominent economists including Goldman Sachs Group Inc.'s Andrew Boak and Westpac Banking Corp.'s Bill Evans have urged the government to bring forward tax cuts to stimulate the economy. Lowe has similarly urged greater infrastructure spending and economic reform to lift productivity.

The government has resisted loosening the purse strings -- maintaining tax cuts and existing infrastructure programs are sufficient -- as it tries to land the first budget surplus since before the 2008 financial crisis. That stalemate is only likely to harden after S&P Global Ratings warned last week that deviating from returning the books to the black could risk the AAA credit rating.

The RBA forecasts economic growth will accelerate: Lowe hopes that a combination of his rate cuts and government tax relief, infrastructure spending, rising house prices, an increase in mining investment and a lower currency will carry the economy through.

--With assistance from Garfield Reynolds and Tomoko Saho.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Malcolm Scott

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