Economic data for the September quarter confirm that Australia’s economy continues to barely inch along. Expansion in GDP slowed to 0.4% during the quarter. Continuing weakness was evident in falling business investment and dwelling construction. Consumer spending flagged to its slowest pace since December 2008 – eking out just a 0.1% increase in the quarter. Modest increases in government activity (both current services and capital investment) partly offset private sector weakness. A $1 billion improvement in the quarterly trade balance was the only bright light in an otherwise pessimistic GDP report. But even that was a mixed blessing: the larger trade surplus reflected both higher exports and lower imports – the latter being another sign of weak domestic spending.

Key points:

• New economic data confirm Australia’s economy has slowed to almost a standstill. Growth in the September quarter fell to 0.4%, held back by declines in business and dwelling investment, and near-zero growth in consumer spending.
• Consumer spending growth was the weakest since December 2008 – when Australians were grappling with the worst moments of the Global Financial Crisis.
• Consumer spending stagnated despite expensive tax cuts provided by the newlyreelected Coalition government. Income taxes paid by Australians declined by over $4 billion in the quarter. But fearing future recession, Australians socked away those savings: personal savings grew by $6 billion in the quarter, more than taxes fell.
• Because of the sharp increase in the saving rate, none of the aggregate tax savings showed up in new consumer spending. The propensity of Australians to consume from their pre-tax income actually declined in the quarter. In other words, the effect of the tax cut had zero measurable impact on aggregate consumer spending.
• Wage growth slowed further in the September quarter – with the Wage Price Index increasing by just 2.2% over year-ago levels. With slowing wage growth and higherthan-expected unemployment, Australian consumers simply cannot afford to boost their spending, despite the tax cuts.
• One-time tax cuts have an insignificant effect on disposable incomes, compared to the benefits of restoring normal wage growth in Australia. In just one year, a restoration of normal wage growth would boost incomes by $12 billion – 3 times the value of the tax cuts. Compounded over just 3 years, normal wage increases would lift incomes by a cumulative total of $75 billion, and consumer spending by $50 billion. Restoring wage growth, not cutting taxes, is the key to turning around Australia’s flagging economy