‘Fragile’ consumers not ready for interest rate hikes
What did Wednesday’s economic growth figures tell us about the path of interest rates?
Not much, if financial markets are anything to go by.
Yes, the Australian economy’s 0.4 per cent growth rate in the September quarter was well below economists’ expectations of 0.7 per cent.
Immediately after the Australian Bureau of Statistics’ statement, money markets reduced the possibility of an interest rate increase in 2026.
In response, the Australian dollar and bond yields fell.
However, when delving into the details, the result was stronger than it seemed at first glance.
The figure has increased significantly as companies reduce their stocks to support exports, but this will support growth as companies replenish their stocks.
AMP chief economist Shane Oliver said overall strong growth in domestic demand was consistent with the ongoing gradual recovery in the economy.
“That’s good news in some ways and there’s also some increase in productivity,” he told AAP.
Once the numbers were digested, the interest rate market is back to where it started, meaning there is about an 85 percent chance of a rate hike in 2026.
Dr Oliver said a recovery in growth would do little to allay the Reserve Bank’s concerns that the economy, growing at 2.1 per cent annually, had reached its speed limit.
Earlier on Wednesday, RBA Governor Michele Bullock acknowledged that it was not yet clear whether the economy had reached capacity, but acknowledged that if the economy accelerated further it could contribute to inflation.
If inflationary pressures persist longer than previously thought, that would have implications for monetary policy, he told the Senate estimates hearing.
Putting the economy on the gas pedal has led to a stronger-than-expected recovery in household consumption.
The rate increased by 0.5 per cent in the September quarter, but this eased partly as smokers switched from over-the-counter tobacco to black market cigarettes. If we compensated for this, consumption would increase by 0.6 percent.
But it was still below the 0.9 per cent rise in the June quarter, and the shift from discretionary spending to essentials suggested households were a bit tired.
“Households remain cost-conscious and are delaying spending until sales events such as Black Friday and Cyber Monday, which will likely feature in December quarter data,” said Ryan Felsman, chief economist at Commsec.
Dr. Oliver said the consumer recovery is still quite fragile, given rumors about possible interest rate hikes next year, falling job positions, high debt levels and rising inflation.
“There are some threats to consumer spending, so I think we need to be a little careful about getting too excited about the uptick here,” he said.
“I think it would be wise for the Central Bank to be a little cautious when evaluating interest rate increases at this stage.”
Dr Oliver expects ABS data to be published on Thursday to show household spending rose 0.4 per cent in October; This is slightly below consensus estimates of 0.6 percent.
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