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Australia’s economy faces sluggish growth in the December quarter

Australia’s economy experienced sluggish growth in the December quarter, marked by a decline in household incomes and stagnating consumer spending, suggesting a potential shift towards lower interest rates.

Treasurer Jim Chalmers acknowledged the economic hurdles, indicating a transition from inflation to growth as the primary focus.

According to data from the Australian Bureau of Statistics (ABS), real gross domestic product (GDP) expanded by a meager 0.2 per cent in the fourth quarter, falling short of expectations set at 0.3 per cent.

This deceleration reflects the effectiveness of elevated borrowing costs in restraining demand, as annual growth plummeted to 1.5 per cent, reaching its lowest point since early 2021.

The softness in domestic demand was evident in household spending patterns, with essential expenditures experiencing modest growth while discretionary spending remained stagnant.

Stephen Smith, a partner at Deloitte Access Economics, underscored the impact of increased interest rates and living expenses on Australian consumers, emphasizing the necessity for policy adjustments to stimulate economic expansion.

The Reserve Bank of Australia (RBA) has enforced substantial interest rate hikes to combat inflation, totaling 425 basis points since May 2022.

Despite a decline in headline inflation to two-year lows, persistent price pressures in services have sustained the possibility of further rate hikes.

Treasurer Chalmers highlighted the imperative for a response to the evolving economic landscape, hinting at a potential budget announcement in May.

Globally, economic growth has decelerated, with nations like Japan, Britain, and the euro zone facing recessionary pressures.

In Australia, growth has been buoyed by record immigration; however, per capita GDP witnessed a 0.3 per cent decline in the December quarter, marking the longest consecutive decline since 1982.

While the household saving ratio experienced a slight uptick, it remained subdued, signaling ongoing economic challenges.

Net trade emerged as a significant growth driver, with reduced imports making a positive contribution to fourth-quarter GDP growth.

Looking forward, analysts anticipate further economic deceleration before a potential recovery in the latter half of the year.

Market projections suggest the likelihood of the RBA implementing its first rate cut in August, signaling a shift towards growth-oriented policies.

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