Australia’s economy slowed more than expected last quarter as aggressive policy tightening weighed on household spending and construction, while accelerating labor costs underlined the nation’s inflation challenge.
The Australian dollar edged lower after GDP advanced 0.2 percent from the previous quarter, the weakest three-month expansion since September 2021 and below a forecast 0.3 percent gain, data showed yesterday.
From a year earlier, the economy grew 2.3 percent, slowing from a downwardly revised 2.6 percent.
Photo: AFP
The result is unlikely to surprise Reserve Bank of Australia (RBA) policymakers who forecast a substantial economic slowdown over the coming year.
However, an acceleration in labor costs would add to worries that price pressures are set to be prolonged even after 12 interest-rate increases since May last year.
Employee compensation accelerated to 2.4 percent in the first three months of the year — the fastest pace since June 2007 — driven by the public sector and higher than usual end of year bonuses.
Unit labor costs, or the difference between nominal wages and productivity, jumped 7.9 percent from a year ago, prompting economists at Goldman Sachs Group Inc to raise their forecast peak rate to 4.85 percent from 4.35 percent previously.
That came just hours after RBA Governor Philip Lowe highlighted a range of upside risks to the central bank’s inflation outlook, including recent wage outcomes and a rebound in house prices, saying the rate-setting board’s patience was being tested.
“Combined with today’s national accounts data showing a surprise acceleration in unit labor costs, we now expect the RBA to hike 25 basis points in July/August/September to a terminal rate of 4.85 percent,” Goldman Sachs chief economist for Australia and New Zealand Andrew Boak said. “We view the risks as skewed to a more elongated tightening cycle.”
Consumer spending growth outpaced the rise in gross disposable income, with the report showing the savings ratio fell to the lowest level in nearly 15 years, Australian Bureau of Statistics national accounts program manager Katherine Keenan said in a statement.
Household spending advanced just 0.2 percent in the first quarter, adding 0.1 percentage points to growth.
“This was driven by higher income tax payable and interest payable on dwellings, and increased spending due to the rising cost of living pressures,” Keenan added.
The GDP data follow back-to-back unexpected RBA hikes that took the cash rate to 4.1 percent, its highest level since April 2012, threatening the central bank’s goal of a soft landing. Economists see a better than one-in-three chance of an Australian recession over the next 12 months as higher borrowing costs begin to crimp domestic consumption.
“Rising interest rates are clearly biting,” Australian Treasurer Jim Chalmers said after the release. “Households pulled back on discretionary spending to make room for the essentials in their household budget. Squeezing household budgets are weighing on economic growth more broadly.”
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