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The Guardian - AU
The Guardian - AU
Business
Peter Hannam Economics correspondent

Australia’s economy likely to slow until stage-three tax cuts, lower interest rates and easing inflation kick in, CBA says

Shoppers at the Myer Centre in Brisbane, Australia
Household spending rose 3.1% in January, reversing most of December’s 3.5% slide, but the pickup may prove short-lived, Commonwealth Bank says. Photograph: Jono Searle/AAP

Australia’s economy is likely to slow until about the middle of 2024 until a combination of tax cuts, interest rate cuts and easing inflation begin to lift spending, according to Commonwealth Bank’s chief economist.

The CommBank Household Spending Insights index rose 3.1% in January, reversing most of December’s 3.5% slide, with the rebound led by a 13.5% rise in travel and recreation spending for the month, thanks in large part to record crowds at the Australian Open in Melbourne. Household goods spending was also up 10.5%.

But January’s pickup may prove short-lived as the effects of the Reserve Bank’s interest rate rise would only be felt this month as variable lending rates get adjusted after a lag. “February numbers will be critical,” CBA’s Stephen Halmarick said.

“We think household spending and overall economic growth is going to continue to moderate for the first half of the year,” he said.

Australia’s gross domestic product likely expanded 1.5% in 2023 with household consumption up just 0.4%, the Reserve Bank said earlier this month. Annual GDP growth will slow further to 1.3% by June before reviving to 1.8% by the end of 2024.

How households respond to the rising cost of living, higher interest rates and taxes was one of the RBA’s key uncertainties in its rates setting. Should spending slow faster than expected, the central bank would be more inclined to cut interest rates.

“With the annual rate of inflation in January expected to be approximately 3.5%, household spending is close to flat in real terms and remains weak on a real per capita basis,” Halmarick said.

The CommBank spending index, which tracks the purchases of more than 7 million CBA customers, registered modest increases in most of its 12 categories. Victoria’s reading was up 2.8% for the month alone, leading other states.

By the second half of 2024, households should start to get some relief, Halmarick said.

The stage-three tax cuts – which have been revised by the Albanese government to increase the benefits for those earning as much as $146,000 a year – would kick in from 1 July, Halmarick said.

CBA predicts the RBA will start to cut interest rates from September, lopping 75 basis points off the current 4.35% by the year’s end. Similar sized cuts should arrive by mid-2025.

Inflation, too, should be “pretty close to 3%” by the end of 2024. Consumer prices were up 4.1% in the December quarter just past, compared with a year earlier.

“The combination of those three things will improve household disposable income,” Halmarick said.

The CommBank index was up 3.6% last month compared with January 2023. The biggest increases were for insurance, up 11.3% from a year earlier, with spending on health up 7.8% and education 6.8%. Spending on transport was down 0.2%.

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