By Stella Qiu

SYDNEY (Reuters) -Australia’s economy in the third quarter grew at the slowest annual pace since the pandemic, disappointing hopes for a rebound as government spending did all of the heavy lifting and consumers remained cautious.

Investors reacted by pushing the Australian dollar 0.7% lower to $0.6442. Markets moved to almost fully price in a rate cut next April at 96% from 73% before, and see a 35 basis points easing for May, from 28 bps before.

Data from the Australian Bureau of Statistics (ABS) on Wednesday showed real gross domestic product rose 0.3% in the September quarter, missing market forecasts of 0.4%.

Annual growth slowed to 0.8%, from 1.0% the previous quarter, contrary to expectations of a small pick up to 1.1%. That marked the slowest pace since late 2020.

The Reserve Bank of Australia had expected economic growth would rise to 1.5% by the end of the year as tax cuts flowed through to households’ wage pockets and consumers became more confident that interest rates would not increase again.

However, the surprisingly weak third quarter result is putting that forecast in jeopardy.

“Put it together on balance, the weak GDP numbers argue for an earlier rather than later cut,” said Shane Oliver, chief economist at AMP that is tipping a cut in May.

“The weakness we’re seeing in the economy, particularly the private sector of the economy, just indicates that there’s still a high chance that we could get a cut in February.”

The ABS said that the expansion was driven by public sector spending, adding 0.6 percentage points to growth, thanks to a record level of public investment. Household spending, which accounts for half of GDP, added nothing.

Treasurer Jim Chalmers described the GDP growth as weak and below historical averages.

“Our economy is still growing but very slowly. It’s weighed down by interest rates and cost of living pressures and the global economic uncertainties as well,” Chalmers said.

CONSUMERS REMAIN CAUTIOUS

The central bank has kept interest rates steady at a 12-year high of 4.35% for the past year and signalled little inclination to ease anytime soon. The weak result suggests monetary policy is doing the job of slowing down demand.

The RBA expected consumer spending to pick up from the tax cuts and slowing inflation, but consumers seem to have stayed cautious for now, even though their disposable income grew 1.5% in the quarter.

The savings rate rose to 3.2% due to the billions of dollars in tax cuts, the ABS noted. GDP per capita, however, dropped another 0.3%, down for the seventh straight quarter.

Signs over recent months have pointed to consumers being in a better mood. Retail sales rose for a third straight month in October as consumer sentiment jumped, and anecdotes from the Black Friday sales event suggest the momentum likely carried through November.

“We expect GDP growth will slowly pick up in the coming quarters… But this improvement will be unspectacular, with the economy set to endure below trend growth in the near term while capacity constraints continue to bite,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.

The report also showed more good news on the inflation gauges, with the GDP chain price index down to 2.4% last quarter and growth in real unit labour costs slowing to an annual rate of 1.6%.

Productivity – the measure of output per hour worked – dropped 0.5% in the quarter, a troubling sign for the RBA as its forecasts on inflation to return to the target band of 2% to 3% in 2026 were centred on a pickup in productivity.

(Reporting by Stella Qiu and Wayne Cole; Editing by Himani Sarkar, Shri Navaratnam and Nicholas Yong)

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