Australia public spending splurge carries economy in Q3

10:18 pm Monday, December 02nd, 2024

By Wayne Cole

SYDNEY (Reuters) -Australia’s government ramped up spending on infrastructure and defence in the third quarter, data showed on Tuesday, making a vital contribution to economic growth as consumers struggled beneath high borrowing costs.

The splurge was fortunately timed as it helped offset a drag from inventories and a disappointing trade performance, likely carrying the entire economy in the quarter.

Figures for third-quarter gross domestic product are due on Wednesday and had been widely expected to show modest growth of 0.4% as consumers remained reluctant to spend even as billions in tax cuts fattened wage packets from July.

Market analysts had forecast annual growth to climb marginally to 1.1% from 1.0%, still the sort of sluggish pace usually associated with the pandemic and recessions.

The biggest driver by far was the public sector as spending at the state and federal level jumped an outsized 2.4% in the third quarter to a record A$183.3 billion ($118.63 billion).

Capital spending on defence alone climbed 35% from the second quarter, while state spending on capital projects rose nearly 9%.

In all, the Australian Bureau of Statistics estimated this would add 0.7 percentage points to GDP in the third quarter, easily the biggest boost since the massive stimulus of the pandemic years.

That helped offset a disappointing performance from trade which saw Australia’s surplus on goods and services shrink to the smallest since mid-2018 as commodity prices fell.

Business investment and housing are thought to have made minor contributions to growth, while a rundown in inventories proved a sizeable drag.

This pedestrian performance has been largely engineered by the Reserve Bank of Australia, which has kept its cash rate at a 12-year high of 4.35% for the past year and shows little inclination toease anytime soon.

Headline consumer price inflation slowed sharply to 2.9% in the third quarter, mainly due to government rebates on electricity bills. Core inflation was more persistent at 3.5%, still above the RBA’s target range of 2% to 3%.

Just last week, the central bank said it would not be easing rates until it was confident inflation was heading back to the mid-point of the target range.

As a result, markets imply just an 8% chance the RBA will cut rates at its next meeting on Dec. 10, and only a 26% probability of a move at the February meeting.

($1 = 1.5461 Australian dollars)

(Reporting by Wayne Cole; Editing by Himani Sarkar and Nicholas Yong)