Australian economy stalls, while persistent inflation and a tight labour market lower prospects for interest rate cuts.

Australia’s economic growth remained subdued in the second quarter of 2024, with GDP growth holding steady at 0.2 percent for the third consecutive quarter. This weaker-than-expected result slowed annual growth to 1.0 percent in June, marking the slowest annual growth since Q4 2020.

Household consumption contracted by 0.2 percent in Q2, the weakest result in nearly three years, as restrictive financial conditions continued to suppress spending, particularly in discretionary categories. Government expenditure increased by 1.4 percent, providing support to the economy through extended social benefits.

While improving, inflation remains above the Reserve Bank of Australia’s (RBA) target range of 2.0 to 3.0 percent, with annual inflation rising from 3.6 percent in March 2024 to 3.8 percent in June 2024. The RBA held the cash rate steady at 4.35 percent in September, citing the need to maintain restrictive policy settings until inflation falls within the target range and is sustained at this level. Government subsidies, such as electricity rebates, are expected to mechanically lower inflation within target range, but this will unlikely be sufficient for the RBA to make the first rate cut. It is broadly anticipated that the first rate cut will take place in early 2025.

Labour market conditions remain tight, although there are early signs of a gradual easing. The unemployment rate held steady at 4.2 percent in August, with employment increasing by 47,500, far surpassing market expectations. The persistently tight labour market is another indicator closely monitored by the RBA, impacting its decision to maintain policy settings in the near term.

The outlook remains uncertain, with risks stemming from the delayed effects of monetary policy, firm pricing decisions and wage responses in the context of slower economic growth. Additionally, a subdued Chinese economy and ongoing geopolitical uncertainties are affecting commodity prices and overall economic conditions.