Softened Growth in December Quarter Sparks Concerns About Australia’s Economic Health

Pedestrians move past a woman sitting on the George Street sidewalk in Sydney, Australia, on Oct. 18, 2022. Lisa Maree Williams/Getty Images

The drop in economic growth in the December 2022 quarter has raised concerns about Australia’s economic outlook as the country continues to struggle with high inflation and interest rate hikes.

In the three months to December 2022, Australia’s GDP (gross domestic product) grew by 0.5 percent, taking the annual growth to 2.7 percent.

The figure was lower than the 0.7 percent increase recorded in the previous quarter and fell short of the 0.8 percent growth forecasted by many economists.

As the economy slowed down, the Business Council of Australia warned that the nation was more vulnerable than ever to global economic headwinds, citing a drop in productivity and business investments.

“Business investment equals jobs and opportunities, but today’s numbers show investment sliding backwards,” Business Council CEO Jennifer Westacott said.

“If we don’t act to lift productivity by driving investment, innovation and new industries, the hip pocket gains for Australians will be short-lived, and they'll continue to fall behind.”

The CEO then urged the federal government to address “serious structural barriers” that were hindering the private sector, including labour shortages and red tape.

Concerns About High Inflation

Meanwhile, the Australian Industry Group feared that the interest rate hiking cycle implemented by the central bank to combat inflation had started to take a toll on the economy.

“There is a clear risk that policy tightening will go too far. One sign of this risk is that were it not for the fall in imports, GDP would have shrunk in the December quarter,” Australian Industry Group CEO Innes Willox said.

Willox also called on governments, businesses and employees to exercise moderation in price setting and wage claims to prevent a wage-price spiral from emerging.

“The risk of a wage-price spiral emerging is real. The consequences of such a spiral are more interest rate rises and the unemployment and household distress this would cause,” he said.

People shop for fruit and vegetable produce at Paddy's Market in Sydney, Australia, on Oct. 22, 2022. Lisa Maree Williams/Getty Images

The construction industry, which is a major contributor to the Australian economy, was also worried about the negative impact of inflation on construction activities.

Master Builders Australia chief executive officer Denita Wawn warned that high inflation could lock an Australian generation out of homeownership and harm investments in the sector.

“As inflation rises, fewer projects can be done for the same amount of capital,” she said.

“For commercial construction, inflation is a capacity killer. High inflation makes business investment more expensive and less attractive by reducing returns and increasing the cost of inputs.

Economic Downturn in the December Quarter

The December quarter marked the weakest economic growth in the past 12 months, with signs of a decrease in domestic demand for goods and services.

Katherine Keenan, the head of national accounts at the Australian Bureau of Statistics, said the main contributors to GDP growth in the December quarter were a 0.4 percent rise in total consumption and a 1.1 per cent lift in net exports.

“Continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports,” she said.

While household spending continued to climb during the quarter, especially in the food and hotels, cafes and restaurants categories, there was a significant fall in household savings.

The household savings rate dipped from 7.1 percent to 4.5 percent, around pre-pandemic levels, indicating that Australians had fewer means to support their spending.

Both public and private investments fell in the December quarter, with the private sector leading the downward trend at 1.7 percent compared to 0.7 percent in the public sector.

Wages and prices continued to grow strongly by 1.4 percent and 2.1 percent, respectively, reflecting the impact of ongoing inflation and a tight labour market.

Treasurer Says Softening Growth Is Inevitable

Following the release of the national accounts, Treasurer Jim Chalmers said the moderating growth in the December quarter was inevitable because of the global economic downturn, high inflation, interest rate hikes and an international energy crisis.

“Over 2022, the Australian economy performed better than any of the major advanced economies and more than double the OECD average,” he told reporters.

As the treasurer welcomed the recovery in tourism and education exports, he commented on the drop in the monthly consumer price index (CPI), which went down from 8.4 percent to 7.4 percent in the year to January 2023.

“We welcome indications from the monthly CPI indicator released today, which suggests that inflation peaked towards the end of 2022,” Chalmers said.

Federal Treasurer Jim Chalmers speaks at Parliament House in Canberra, Australia, on July 28, 2022. Martin Ollman/Getty Images

Meanwhile, Shadow Treasurer Angus Taylor said the new economic figures reflected the struggling of Australian families.

“Energy bills have soared, mortgage payments are rising every month, rents have increased, grocery costs are rising by the day, and Labor’s promised real wage increase hasn’t eventuated,” he said.

Westpac Bank economists said while the new national accounts would send some signals to the Reserve Bank about the economic slowdown, they would not cause the bank to deviate from its goal to bring inflation down to the two to three percent target band.

The economists believed the central bank would continue to lift the official cash rate in March, April and May.

“The Board will not receive another update on the economy through the national accounts until the day after the June Board meeting,” Westpac chief economist Bill Evans said.

“We expect that there will be sufficient evidence in line with the signals from today’s accounts to allow it to pause before the rate cuts that we expect from the March quarter in 2024 ensue.”