Australians are feeling the pinch. As cost-of-living pressures grow, many are cutting back on their discretionary spending, leaving a mark on the economy. According to the Australian Bureau of Statistics (ABS), household consumption shrank by 0.2% in the June 2024 quarter—the weakest result since the Delta variant lockdowns in September 2021.
The economy still managed to grow, but only just. Gross domestic product (GDP) rose by 0.2% for the quarter, bringing annual growth to 1.5% for the 2023-24 financial year. Yet, the reality beneath the numbers tells a story of cautious households, strained government budgets, and a private sector trying to find its footing in a challenging environment.
While GDP might show a glimmer of progress, household spending is pulling the economy back. Aussies are holding onto their wallets more tightly, and it’s showing across several sectors. Discretionary spending, which includes non-essential goods and services, took a 1.1% hit. The biggest casualties were transport services, down by 4.4%, and hospitality, with hotels, cafes, and restaurants seeing a 1.5% dip in spending. These areas had shown strength earlier in the year, but Australians appear to be shifting priorities, perhaps in response to rising costs or a desire to save.
Essential spending managed to tick up by 0.5%, driven by necessities like rent and utilities. As the population continues to grow, rents are rising steadily, and the cooler-than-usual June quarter saw an uptick in energy usage, with electricity, gas, and other fuel costs climbing by 2.4%. The phasing out of electricity rebates during this period also contributed to higher household energy bills. And while some expenses like food dropped by 1.0% as people looked for more affordable groceries, the strain on budgets is clearly visible.
But not every corner of the economy is slowing down. Household spending on furnishings and equipment saw a significant rise of 4.0%. End-of-financial-year sales likely spurred the purchases of household electronics, with imports of these items up by 16.0%. This bump in consumer goods purchases was one of the few positives in an otherwise subdued quarter for spending.
As household consumption slumped, government spending came to the rescue—at least to some extent. Government consumption grew by 1.4%, thanks in part to Commonwealth social assistance benefits and national health programs. These initiatives kept demand afloat, offering some relief amid broader economic headwinds. State and local governments also played a role, with increased spending on employee wages, though the overall effect wasn’t enough to make a dramatic difference.
On the investment front, the public sector was less of a lifeline. Public investment fell by 1.4%—the third consecutive quarterly drop—as several major transport and health infrastructure projects neared completion. With fewer new projects on the horizon, the question now is how public investment will maintain its role in supporting economic growth.
Private investment, on the other hand, managed a modest 0.4% increase. This was primarily driven by non-dwelling construction, as new mining projects and data centres provided a boost. Despite this, businesses have been reluctant to invest heavily, with adverse business conditions weighing down spending on machinery and equipment. The uncertainty in the global economic landscape is making businesses think twice before committing to non-essential capital investments.
In the housing market, dwelling investment grew by 0.1%, largely due to a rise in new house completions. Labour shortages, particularly in the finishing trades, had previously delayed many projects, but those bottlenecks seem to be easing. Ownership transfer costs also went up by 3.9%, reflecting a continued churn in the property market. While demand remains strong, affordability is becoming an increasing challenge, especially with rising interest rates putting pressure on new buyers.
One concerning development in the quarter was the 3.0% drop in the terms of trade. This is a measure of how much Australia earns from its exports compared to what it spends on imports. A fall like this suggests that the country is getting less value for its exports, which could slow down growth in sectors like mining and agriculture. As global demand weakens, particularly from major trading partners, Australia may find it harder to maintain its export-driven economy.
Meanwhile, household saving rates stayed steady at 0.6%, unchanged from the previous quarter. This low saving rate highlights just how stretched many Australians are, with little room left in their budgets for setting aside money for a rainy day. As inflation continues to bite and interest rates remain elevated, households are increasingly turning to credit or dipping into their savings to make ends meet.
The road ahead for the Australian economy remains uncertain. On the one hand, GDP growth—however sluggish—shows that the economy hasn’t ground to a halt. On the other, household consumption is crucial for long-term economic health, and the signs of frugality among Australians are hard to ignore. The challenge will be in maintaining growth while households face rising costs in essentials like rent, utilities, and groceries.
Public investment is another area that needs attention. With major projects winding down, the pipeline for new infrastructure spending appears thin, and without further investment, the economy could lose one of its key supports. Private investment, too, needs a boost. While construction projects like new data centres and mining developments offer some promise, business confidence remains shaky, and non-essential investments continue to be delayed.
Adding to these challenges is the fall in the terms of trade, a signal that Australia’s export sector could face hurdles in the coming months. With global economic conditions remaining volatile, the country’s ability to secure favourable prices for its exports will be vital to keeping the economy on an upward trajectory.
As Australia enters the second half of 2024, policymakers face a delicate balancing act. Ensuring that households have the support they need to navigate rising costs, while fostering an environment that encourages business investment, will be critical. For now, the economy is moving forward, but the road is anything but smooth. As Australians continue to tighten their belts, the country’s economic engine might find itself running on fumes if these challenges aren’t addressed.
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