Eating in and staying home: Australian economic growth slows to pandemic levels as consumers cut back

Australian gross domestic product (GDP) grew by 0.2 percent in the December quarter and by 1.5 percent over 2023, according to figures from the Australia Bureau of Statistics (ABS). This is the slowest annual growth rate since the pandemic, driven largely by a fall in household consumption and consumer spending. In per capita terms, GDP actually fell by 1 percent over the year while the population grew by approximately 2.5 percent.

CBA Head of Australian Economics Gareth Aird said “momentum in the economy has ground to a halt”, with consumer spending weakening beyond the Reserve Bank’s (RBA) expectations. “On a per capita basis real consumer spending is down by a very large 2.4% over the year,” Mr Aird said. “Such an outcome would normally be associated with a large negative shock or recession. The weakness in the consumer lies at the heart of the soft GDP outcomes.”

Mr Aird said household consumption declined significantly on a per capita basis in 2023, and the RBA would be surprised by the level of weakness. He noted that in November, the RBA was forecasting annual household consumption to come in at 1.1 percent for 2023. The RBA lowered its forecast to 0.4 percent last month. The actual figure reported by the ABS yesterday is 0.1 percent.

“The RBA’s highly aggressive rate hiking cycle has clearly worked to slow demand growth in the economy,” he said. “Rising mortgage payments along with a lift in tax payable and the effects of elevated inflation have weighed on household purchasing power.”

Mr Aird said the interest paid on housing debt had increased by almost 40% over the past year.

“The ongoing expiry of ultra-low fixed rates will see interest paid continue to grow at a decent clip until the RBA cuts the cash rate. For context, interest paid on housing debt is up by a massive 162% from pandemic lows.”

Lower household consumption is being driven by cuts in discretionary spending because electricity, rent, food and health are costing more. Australians are eating at home more often and spending less on recreation, and fewer people are buying new cars, clothes or footwear.

The December quarter captures the Australian summer holiday period. During the quarter, there was a 9% fall in overseas travel spending as Aussies chose cheaper holidays, preferring destinations closer to home with New Zealand and Indonesia the most popular destinations.

Mr Aird notes the level of new home building in Australia has dropped well below where it was pre-pandemic. There was a 3.8 percent fall in residential property investment during the December quarter due to a major decline in new construction and renovations. “Against a big lift in population growth, the supply and demand mismatch in the housing market has put significant upward pressure on rents,” Mr Aird said. “It has also fed into the increase in home prices over the past year despite the big reduction in borrower capacity due to significantly higher mortgage rates.”

Mr Aird said business investment was “a bright spot” in the economy, up 8.2% over the year. This was largely due to an increase in non-residential and engineering construction over 2023. Katherine Keenan, ABS head of national accounts, said the key drivers of non-dwelling building construction in the December quarter were data centres and warehouses.