Australian economy defies rate hikes as exports drive growth

Australia’s economy maintained momentum in the three months through June driven by strong export demand for goods and services, suggesting a still-solid impulse in the face of 12 interest-rate increases.

Gross domestic product advanced 0.4%, the same pace as the prior quarter and in line with economists’ estimates, Australian Bureau of Statistics data showed Wednesday. From a year earlier, the economy grew 2.1% from an upwardly revised 2.4%. 

The result will bolster the Reserve Bank’s confidence that it can bring the economy in for a soft landing as it cools inflation. Policymakers anticipate a slowdown in response to their 4 percentage points of rate hikes since May 2022 while a housing crisis in China — the biggest buyer of Australian goods and services — is likely to reinforce that.

“Capital investment and exports of services were the main drivers of GDP growth this quarter,” Katherine Keenan, ABS head of National Accounts, said in a statement. “Spending on essential goods and services were the main contributors to the rise in household spending, while many discretionary categories detracted.”

Despite the solid headline number, Australia’s expansion will probably weaken from here. For one, there is growing uncertainty around China’s economic outlook; and secondly, Australian households are already facing a squeeze with Wednesday’s data showing their savings ratio declined to 3.2% from a downwardly revised 3.6% three months earlier. 

Household spending rose 0.1% in the second quarter, adding 0.1 percentage point to growth, while government spending advanced 0.4%, also adding 0.1 point to GDP.

The GDP data comes a day after the RBA opted to keep rates unchanged at 4.1% for a third straight month as policymakers assess the impact of hikes to date. The cautious approach underscores a desire to hang on to some of the employment gains made during the pandemic while bringing down inflation.

Also helping are growing expectations that the US economy will avoid a slump. 

Central banks worldwide are near the peak of their tightening cycles as inflationary pressures begin to abate. The Federal Reserve is seen as likely to skip its September meeting with consumer prices rising modestly in July in what was the smallest back-to-back inflation readings in over two years.

For Australia’s center-left government, the GDP data will be a rare burst of good news amid still-elevated consumer prices and high borrowing costs.

“The National Accounts show the Australian economy remaining sturdy in the face of unrelenting pressure,” Treasurer Jim Chalmers said in a statement after the release, highlighting the slowdown in China. “We know there are challenges ahead, but we face them from a position of relative strength.”

To date, the nation has benefited from high export prices that have brought a windfall to fiscal coffers, including returning the budget to surplus for the first time in 15 years.

Today’s GDP report also showed:

• Machinery and equipment rose 4.2%, adding 0.2 point to GDP
• Compensation of employees climbed 1.6%, adding 0.4 point, and soared 10.1% over the year
• Inventories were the biggest drag, subtracting 1.1 percentage point
• Per capita GDP fell 0.3%