Rate cut chances drop as economy grows beyond expectations

Mortgage holders may have to wait longer for further interest rate relief after new figures revealed the Australian economy finally weaning itself off government life support, replaced by the nation’s army of consumers.

The economy expanded by a larger-than-expected 0.6 per cent in the three months to June, the Australian Bureau of Statistics reported on Wednesday, taking annual growth to a two-year high of 1.8 per cent.

A 1.4 per cent jump in spending on non-essentials, from gym memberships to furniture, helped lift the economy. Consumer spending on recreation and cultural pursuits increased by $700 million, accounting for almost 20 per cent of the improved performance.

Shoppers leapt on end-of-financial-year sales and took advantage of the proximity of Easter and ANZAC day to extend their holiday breaks.

That extra spending and lift in disposable income was aided by the Reserve Bank’s February and May interest rate cuts, a slowdown in inflation and a lift in take-home wages for most workers.

But it could cause problems for the bank and its plans for further rate cuts, with financial markets now effectively dismissing any chance of a reduction at the RBA’s September meeting.

CreditorWatch chief economist Ivan Colhoun said changes in unemployment would be key in determining the pace and timing of future interest rate cuts.

“The next [interest rate cut] will likely be in November unless the unemployment rate prints above 4.3 per cent for August, in which case the probability of a September rate cut would increase,” he said.

The economy has been largely supported for more than two years by government spending, both on ongoing services and major infrastructure projects.

Treasurer Jim Chalmers said the figures showed a “substantial pick-up” in growth, noting that GDP was running equal to or faster than every major developed nation.

He said the most positive aspect was the shift away from government spending towards the private sector.

“This is the private sector recovery that we were planning for, preparing for and hoping for,” he said.

But shadow treasurer Ted O’Brien said numbers showed the economy was “certainly not out of the woods yet” and that Australians continued to feel cost of living pain.

“The Australian economy last financial year grew at its weakest rate since the 1990s outside of the pandemic,” he said.

Financial markets and economists are still expecting one more interest rate cut this year from the Reserve Bank.

AMP deputy chief economist Diana Mousina said while there was room for the RBA to cut rates given the economy was still growing below the rate at which it might lead to higher inflation, the bank was likely to keep interest rates on hold at its September meeting.

“Today’s data should signal to the RBA that an immediate interest rate cut is not necessary,” she said.

Outside recreational pursuits, spending lifted on furnishings and household equipment (1.7 per cent), new cars (2.4 per cent), and hotels and cafés (0.7 per cent) all ramped up.

Expenditure on essentials in categories such as health (1.9 per cent) and electricity and gas (2.9 per cent) also increased as households accessed more medical services during a strong flu season, while promotional activity from major supermarket chains boosted spending on food.

The household savings ratio – the share of disposable income households save – dropped to 4.2 per cent in the June quarter but was revised up for the March quarter to 5.2 per cent.

GDP per person – a key measure of living standards – grew by 0.2 per cent and is at its highest level since March 2024. Productivity levels also increased, but still remain well down on their pre-COVID levels.

Government spending was stronger, climbing 1 per cent in the three months to June on the back of a rise in social benefits to households, more spending on Medicare and the Pharmaceutical Benefits Scheme, and the costs of running the election. Defence spending also rose because of military exercises.

While federal spending was higher, state and local government spending slipped as electricity rebate schemes wound down.

In another sign that the private sector is starting to accelerate, the gross value added per hour worked in the market sector grew by 0.5 per cent.

Net trade also contributed to economic growth as iron ore and LNG exports rebounded.

However, business investment continues to be muted. Total private investment rose by 0.1 per cent on the back of a lift in spending on intellectual property, dwellings and machinery. There was a 1.2 per cent drop in non-dwelling construction.

Public sector investment dropped 3.9 per cent as a number of major energy, road and rail projects were completed.

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