© Reuters. FILE PHOTO: Office workers cross a road in Sydney, Australia, September 4, 2017. Picture taken September 4, 2017. REUTERS/Steven Saphore
by Wayne Cole
SYDNEY (Reuters) – Australia’s economy grew at its weakest pace in a year last quarter as strong trade was offset by rising interest rates and high inflation, with all indications looming further slowdown.
Indeed, without the sizeable contribution from trade, the economy would have contracted in the December quarter, as rising prices eroded consumers’ purchasing power and led them to save less. Data from the Australian Bureau of Statistics (ABS) showed on Wednesday real gross domestic product (GDP) rose 0.5% in the December quarter, up from 0.7% in the previous quarter and below forecasts. of 0.8%.
Annual growth was still strong at 2.7%, but the report contained plenty of evidence of cost and price pressures that underscore the case for even higher interest rate hikes in the fight against inflation.
Domestic prices rose at the strongest annual pace since the early 1990s, with service inflation fueled by shortages of skilled workers and rising labor costs.
Separate ABS data released on Wednesday showed its monthly gauge of consumer prices rose 7.4% less than expected in the year to January, but that was the second-highest reading on record.
Such pressures have prompted the Reserve Bank of Australia (RBA) to raise its cash rate by 325 basis points since last May, taking it to a decade high of 3.35% and marking more to come.
Markets are betting that rates will continue to rise, peaking at around 4.35% by mid-year.
However, there are also signs that high borrowing costs are working to constrain demand. Household consumption rose just a meager 0.3% in the December quarter, while economic output excluding international trade actually fell 0.5%.
“After four quarters of strong growth following the Delta variant lockdowns, growth in household spending softened in the December quarter,” said Katherine Keenan, director of National Accounts at ABS.