Growth unexpectedly slumps despite spending surge Michael ReadEconomics correspondent
Dec 4, 2024 – 11.57am
Annual gross domestic product growth unexpectedly slumped to 0.8 per cent last quarter even as federal government spending hit a record-high share of economic activity.
The economy grew by just 0.3 per cent in the September quarter, the Australian Bureau of Statistics said on Wednesday, after a strong rise in government spending offset declines in non-residential building and private sector inventory investment.
The figure was weaker than market expectations of a 0.5 per cent lift in GDP and caused the annual rate of economic growth to fall to 0.8 per cent from 1 per cent in June.
The outcome marked the weakest rate of annual GDP growth since the 1990s recession outside the COVID-19 pandemic, and the seventh straight quarterly decline in GDP per person.
Economic growth has slowed sharply since the Reserve Bank of Australia started raising interest rates in May 2022 to get on top of the worst inflation outbreak in decades. The RBA has lifted the cash rate 13 times from 0.1 to 4.35 per cent, pushing up loan repayments for millions of borrowers and leaving less cash for discretionary spending.
Governments propping up the economy
With voters under the pump from cost of living, the federal and state governments this year announced a suite of household support measures to try and shore up voter support.
The national accounts figures were affected by the introduction of a series of cost of living policies on July 1, including $300 federal government electricity bill rebates, and state government energy subsidies in Western Australia, Queensland and Tasmania.
The policies in turn raised public sector spending by 0.8 percentage points, increasing the government’s contribution to quarterly GDP growth by 0.2 percentage points at the expense of households.
The extra spending helped push federal government outlays to a record 12.3 per cent of nominal GDP last quarter. State government spending hit 16.5 per cent of nominal GDP.
Total government spending as a share of GDP is actually larger than Wednesday’s headline numbers because they do not include interest payments on debt and welfare payments.
The RBA last month admitted it had underestimated the size of the recent increase in federal and state government spending, which has been fuelled by rising public sector wages, ambitious state government infrastructure programs, and higher spending on recurrent programs like the $49 billion National Disability Insurance Scheme.
Treasurer Jim Chalmers has sought to paint the spending increase as a virtue, arguing growth would be even weaker were it not for the public sector.
Recurrent government spending, which includes cost of living subsidies on programs like Medicare and the NDIS, rose by 4.7 per cent over the year to September, well above the 3.4 per cent average in the decade before the pandemic.
The larger-than-anticipated government spending has added to demand in the economy, which some economists have said is prolonging the RBA’s inflation fight and delaying interest rate cuts. Most economists do not expect the RBA to cut interest rates before the federal election, which must be held on or before May 17.
Home building being hammered
Activity in the private sector, by contrast, remains muted.
Non-residential construction activity dropped by 2.7 per cent in the three months to September, the ABS said.
Residential home building activity has also been hammered by high interest rates, contracting 0.5 per cent over the past year once adjusted for inflation, despite a modest lift in volumes in the September quarter itself.
Labour shortages and higher material costs have prevented home builders from completing the existing pipeline of work approved during the pandemic, contributing to a sharp rise in insolvencies in the construction sector.
While household spending was unchanged in the September quarter, the figure would have been higher in the absence of government subsidies.
