Global Courant
View of the Yarra River flowing through Melbourne’s city center in Australia.
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Australia’s gross domestic product grew 2.3% year on year in the first quarter, just below analysts’ expectations.
Economists polled by Reuters had forecast growth of 2.4%, compared to growth of 2.7% in the fourth quarter of 2022. Quarter on quarter, GDP grew by 0.2%, compared to the expected 0.3% in the Reuters poll.
Katherine Keenan, Head of National Accounts at Australian Bureau of Statisticssaid, “This is the sixth straight quarterly increase in GDP, but the slowest growth since the Covid-19 Delta lockdowns in September quarter 2021.”
“Private and public gross fixed capital formation were the main drivers of GDP growth this quarter,” said Keenan.
The GDP measures are key to the Reserve Bank of Australia’s monetary policy decision-making process. As recently as Tuesday, the RBA surprised markets and raised its policy rate by 25 basis points to 4.1%, an 11-year high.
‘The Narrow Path’
Early Wednesday morning, Philip Lowe, Governor of the Reserve Bank of Australia gave a speech at the Morgan Stanley Australia Summit, reiterating its position that the central bank will try to take a “narrow path” in the country’s monetary policy.
On this “narrow path” envisioned by Lowe, Australian inflation returns to its target range of 2% to 3%, the economy continues to grow and labor market gains are maintained.
“It is still possible to navigate this path and it is our ambition to do so. But it is a narrow path and probably a bumpy one, with risks on both sides,” said Lowe.
Lowe clarified that the intention to maintain the improving labor market “does not mean that the (RBA) will tolerate continued higher inflation.”
As such, the decision to raise interest rates again on Tuesday was made “to build greater confidence that inflation will return to target within a reasonable time frame,” he said.
Lowe listed the economic data the RBA will monitor to move forward, including the global economy, household spending and unit labor cost growth.
Abhijit Surya, the Australian and New Zealand economist at Capital Economics, thinks that while GDP has slowed and is expected to slow further, productivity growth remains “dismal”.
Surya wrote that GDP per hour worked fell 0.3% on a quarterly basis during this period, resulting in an annual decline in productivity of 4.6% – the largest ever recorded.
He also adds that labor market data suggest that productivity will most likely have weakened further this quarter, supporting unit labor cost growth and keeping services inflation stubbornly high.
Surya currently has a peak estimate of 4.35% for the RBA’s benchmark rate, but in light of GDP readings and Rowe’s speech, he emphasizes that “there is a real risk that the RBA could raise rates even further. “
