Australian economy can slow until tax cuts

Australia’s economy is anticipated to experience a slowdown until mid-2024, according to the chief economist of the Commonwealth Bank. The CommBank Household Spending Insights index showed a 3.1% rise in January, reversing the previous month’s 3.5% decline. The rebound was primarily driven by a 13.5% increase in travel and recreation spending, attributed to record attendance at the Australian Open in Melbourne, while household goods spending also rose by 10.5%. However, the chief economist, Stephen Halmarick, expects this uptick to be short-lived, pointing to the impact of the Reserve Bank’s recent interest rate hike, which will only be felt in February as variable lending rates are adjusted.

Halmarick suggests that household spending and overall economic growth are likely to moderate in the first half of the year. The Reserve Bank previously indicated an estimated 1.5% expansion in Australia’s gross domestic product (GDP) in 2023, with household consumption increasing by just 0.4%. Annual GDP growth is expected to slow to 1.3% by June before recovering to 1.8% by the end of 2024.

The response of households to the rising cost of living, increased interest rates, and taxes remains a key uncertainty for the Reserve Bank. Halmarick notes that with an expected annual inflation rate of around 3.5% in January, household spending is nearly flat in real terms and weak on a per capita basis.

The Commonwealth Bank predicts relief for households in the second half of 2024. Stage-three tax cuts, set to take effect from July 1, are expected to enhance benefits for individuals earning up to $146,000 a year. Additionally, the bank forecasts the Reserve Bank to start cutting interest rates from September, with a total reduction of 75 basis points by the end of the year, followed by similar cuts by mid-2025. Halmarick anticipates inflation to be “pretty close to 3%” by the end of 2024, given that consumer prices increased by 4.1% in the December quarter compared to the same period a year earlier.

The CommBank index, tracking purchases of over 7 million CBA customers, showed modest increases in most of its 12 categories, with Victoria leading other states with a 2.8% monthly increase. The chief economist emphasized that the combination of tax cuts, interest rate cuts, and easing inflation is expected to improve household disposable income.

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