The door for rate cuts opens further

Pendal

December 2024

THE Australian economy grew by only 0.3% in the September quarter, once again falling behind population growth.

We managed only 0.8% growth for the year, yet the RBA still thinks demand outstrips supply.

The September quarter GDP numbers were always going to be more interesting than most.

Tax cuts and government subsidies were hitting consumer pockets and the big question was whether they would be spent or saved. For now, it appears consumers have been happy to pocket the extra money.

Spending by business and consumers once again flatlined and per capita consumption fell by 2% over the year.

The only growth we could find was, once again, the government - which now comprises almost 28% of GDP, up from around 23% for most of the past 50 years.

The graph below, courtesy of Westpac, highlights this extraordinary return of big government.

Source: Westpac Economics

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

The national accounts also provided more information around wage pressures. As the high wage outcomes of 2022 and 2023 have faded from view, these are easing quickly.

Average earnings per hour moderated to 3.2%yr, from 6.5%yr in the June quarter. This is consistent with recent wage data at 3.5%.

We have weak growth, moderating inflation, wages under control and global easing cycles - so why the hesitation from the RBA?

The central bank remains focused on the idea that the labour market remains too tight, as it believes that 4.5% - not the current 4.1% - to be full employment.

The data is now suggesting otherwise.

Outlook

It will be an interesting few upcoming meetings for the RBA board.

February will likely be the last monetary policy board decision for three of the six independent directors. And March or April will see a split into governance and monetary policy boards.

Whether this influences thinking remains to be seen, but the current spirit of caution may yet stop a rate cut in February.

However, I think the RBA may do a short sharp pivot in the next few months, and view two cuts (in February and May) as still on the cards.

The Q4 inflation data at the end of February will be another low number, with even underlying inflation likely to print 0.6%, or annualised at the RBA midpoint.

While bond investors will be cheering for a cut, the Labour government will be desperate for one ahead of the "cost-of-living" election.

Time will tell if the RBA delivers for them.

Author: Tim Hext

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