Sticky inflation is keeping interest rates higher for longer, dragging on demand across the Australian economy. Growth came to a standstill in Q1 2024, with only 0.1 percent increase in output over the quarter. Consumer spending came in higher than anticipated, increasing by 0.4 percent, however, most of the growth was driven by essential services, with spending on electricity and gas rising 4.9 percent. Compared to the March quarter of 2023, total household spending on goods fell by 0.6 percent.

Households are also saving less, with just 0.9 percent of their income set aside this quarter. This latest data demonstrates that total household savings have remained below 2.0 percent for a year, a first since the Q1 2008. Higher interest rates continues to impact the economy, as increased mortgage payments are squeezing household disposable income, which is expected to keep consumption subdued for a longer period.

Private investment fell by 0.8 percent, driven by a decline in mining and non-residential construction. Additionally, dwelling approvals were down 8.0 percent in the 12 months to June, impacted by higher interest rates and cost of living pressures.

The labour market has remained relatively tight, with the unemployment rate staying largely unchanged since December 2023. However, slower economic activity is expected to dampen labour demand, which should translate into a gradual increase in unemployment over the coming months.

Annual wage growth in March reached 4.1 percent, increasing by 0.8 percent over the quarter. The slow pace at which the labour market is loosening will continue to place upward pressure on labour costs in the near term as shortages persist. The RBA will closely monitor wage-price movements to assess any potential contributors to higher inflation and to determine if any action is required. At present, we expect that interest rates will stay unchanged until early 2025 when we anticipate the first rate cut.