Paul Karp 

Slow GDP growth deflates government hopes of tax cuts bounce

The Australian economy grew by just 0.4% in the September quarter for total yearly growth of 1.7%, GDP figures show
  
  

Josh Frydenberg speaks during House of Representatives Question Time
Household gross disposable income rose 2.5% due to tax cuts and lower mortgage repayments, but household expenditure rose just 0.1% due to weak spending on discretionary goods and services. Photograph: Lukas Coch/AAP

Coalition hopes of an income tax cut led recovery have been deflated by figures showing the Australian economy grew by just 0.4% in the September quarter, for total yearly growth of 1.7%.

The Australian Bureau of Statistics released the gross domestic product figures on Wednesday, confirming that growth has slowed from 0.6% in seasonally adjusted chain volume terms in the June quarter although yearly growth has ticked up from a revised figure of 1.6%.

The treasurer, Josh Frydenberg, said the figures showed the Australian economy was “remarkably resilient” in the face of global headwinds such as trade tensions,and local conditions including drought.

Frydenberg told reporters in Canberra the government would continue to “stay the course” in seeking the first budget surplus in 12 years. Scott Morrison said he was “pleased” by the figures, which Labor’s Jim Chalmers labelled “an outrage”.

Despite government hopes this quarter would see a bounce off the back of tax cuts for low and middle income earners of up to $1,080, household expenditure increased by just 0.1% due to weak spending on discretionary goods and services.

Household gross disposable income increased by 2.5% due to the tax cuts and lower mortgage repayments after three interest rate cuts this year. But households did not chose to boost spending – instead discretionary spending fell 0.3% and the savings ratio rose to 4.8%.

While mining investment declined 7.8% this quarter and 11.2% through the year, government final consumption expenditure rose 0.9% in the quarter and remains strong through the year at 6.0%.

ABS chief economist, Bruce Hockman, said: “The economy has continued to grow, however the rate of growth remains well below the long run average.”

“The reduction to tax payable did not translate to a rise in discretionary spending, which led to a visible impact to household saving.”

Frydenberg conceded he would “like consumption to be higher” but put a positive spin on the savings rate, suggesting that households paying down debt would allow them to spend more later.

The shadow treasurer, Jim Chalmers, said the government had suffered “total humiliation” due to the weaker-than-expected result, telling reporters that “clearly the tax cuts are not doing the job”.

“Josh Frydenberg keeps lowering the bar and keeps tripping over it. The test isn’t if there is any growth in the economy at all – the test is whether there is enough growth to boost wages.”

Chalmers suggested the government should consider a business investment tax incentive among other measures to boost growth.

Earlier, Frydenberg said the government is in discussions with business about possible initiatives but refused to say if they could be contained in the mid-year economic and fiscal update due later in December.

The Reserve Bank has suggested the Australia economy is at a “gentle turning point” after disappointing annual growth figures of just 1.4% in the year to June – the lowest recorded annual rate since 2009. The International Monetary Fund has forecast that growth will return to 2.3% in 2020.

Although the Morrison government has attempted to stimulate the economy by accelerating infrastructure spending, Scott Morrison and Josh Frydenberg have persisted with a contractionary fiscal policy in the hope of banking a surplus.

Capital Economics senior Australian and New Zealand economist Marcel Thieliant said the “subdued rise in GDP” – lower than the Bloomberg consensus of 0.5% and a “marked slowdown” from the last quarter of 0.6% – meant the RBA “will have to provide more stimulus before long”.

“Particularly disappointing was the measly 0.1% [quarter on quarter] increase in private consumption.

“This was the slowest increase since the global financial crisis and underlines that the government’s tax cuts aren’t providing any boost to consumer spending.”

“While the 0.7% quarterly fall in private investment wasn’t as bad as we had anticipated, the RBA’s forecast that it will be rising by 3.2% by year-end looks wide of the mark.”

Sarah Hunter, chief economist for BIS Oxford Economics, agreed that the figures showed “chronic weakness in household spending” and “no sign yet” that the increase in tax offsets and rate cuts are supporting consumption.

Hunter also noted that private investment was weak, with dwelling investment down 1.7% this quarter, although “there was some good news from the housing market”, with an increase of 4.5% spending on ownership transfer costs such as conveyancing and real estate agents indicating a recovery.

“Broadly speaking, today’s data confirms our view that on an annualised basis the pace of growth is broadly likely to hold around 2% for the next 12 months.”

With the official cash rate currently sitting at 0.75%, the Reserve Bank governor, Phil Lowe, has suggested the central bank could make two further cuts to 0.25% before it would consider creating money to buy government bonds as it runs out of levers to boost the economy.

 

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