Australia’s real GDP growth rate is slowing and real GDP per capita is already in technical recession with back-to-back quarterly falls in Q2 and Q3 2023 according to the Q3 GDP release last week. Data relating to household disposable income contained in the same report also highlight the pressure on households from higher income tax (the removal of the low-and-middle income tax rebate) and higher interest rates driving up income payable by 6.3% q-o-q, 27.9% y-o-y, the highest annual growth in this measure since 1977. Essentially, these signs of slowing economic growth and intense pressure on household income add to the case for the RBA to take time assessing incoming data before deciding its next interest rate move.

The signs of slowdown in the GDP release, however, do not in our view negate the need for another rate hike at some stage or constitute reason for an early start to cut interest rates before late 2024. Aggregate demand is still firm enough to make reducing inflation towards the RBA’s 2-3% target a slow and bumpy affair.

It is worth noting that price pressures remained very high in the GDP report. The GDP implicit price deflator rose by 1.0% q-o-q. Prices relating to domestic demand rose even faster with the domestic implicit price deflator up 1.3% q-o-q., 5.2% y-o-y, the annual change close to its highest reading in 30 years. The high price deflators explain why seemingly weak real GDP growth in Q3, +0.2% q-o-q , +2.1% y-o-y with real GDP per capita -0.5% q-o-q, -0.3% y-o-y translate to still quite high nominal (current price) GDP growth, +1.2% q-o-q, +4.5% y-o-y.

Businesses and households transact in a current price world and the demand growth including price changes in that world remain rapid enough to sustain employment and wage growth. The income-based measure of GDP showed that in Q3 compensation of employees rose by 2.6% q-o-q, 8.4% y-o-y. It was an unusual quarter, with large one-time pay increases and a big lift in the minimum wage. Also, employment was still strong in the quarter. Nevertheless, growth in this wage measure is likely to stay above 6% y-o-y over the next two quarters and stay inconsistent with bringing inflation down quickly.

In Q3 the big lift in wages was more than swallowed up by higher income tax commitment and higher interest rates. Wages contributed 2.0 percentage points to growth in household disposable income in the quarter, but that was less than 2.4 percentage points contribution and payable for higher income tax and interest rates. By running down savings – the household savings ratio fell to 1.1% in Q3 from 2.8% in Q2 – households were still able to maintain consumption spending which was flat in real terms in Q3 and up only 0.4% y-o-y.

The fall in savings also allowed more spending on housing. Spending directly on housing rose by 0.2% q-o-q in Q3 while spending on ownership transfer costs (mostly housing transfer costs) rose by 2.0% q-o-q. Spending on housing still appears to be growing in Q4. The total value of home loans in October rose by 5.6% m-o-m.

Of course, there are special factors at work keeping demand for housing relatively strong. Population growth driven by record high immigration is outstripping supply of housing by a wide margin. The housing demand/supply imbalance is starting to be tackled by policymakers but in relatively small and slow to implement changes that are unlikely to make a material difference to the imbalance for another year or more at least.

In the mean-time households have reason to stretch their finances to buy a home, invest in a home or get into a rental property. That compelling reason continues to escalate house prices and rents.

Despite the signs of slowing real economic growth and pressure on household budgets contained in the Q3 GDP report, there are also signs of the economy generating too high price pressure and wage pressure likely to prolong the battle to reduce inflation. Also, there is little sign that demand for housing is waning, if anything it is accelerating throwing another curve ball into the inflation battle.

There is enough sign of slowing growth in the Q3 GDP report to allow the RBA to take time assessing economic data reports over the next month or two to decide whether another rate hike is necessary. The signs in the GDP report of high domestic prices, high wage growth and exuberant housing demand also say the RBA’s decision choice is between rates on hold or a rate rise for many months ahead. The eventual pivot towards cutting the cash rate is a long way off and is contingent upon a run of much softer economic readings.