Aussies are spending again. But what does it mean for rate cuts?

The latest GDP data shows Aussies are spending again. Pendal’s head of government bond strategies TIM HEXT explains what it means for interest rates

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AUSSIE consumers are spending again – that’s the main message from the latest quarter GDP numbers for Australia released today.

Overall, growth was slightly higher than expected at 0.6% versus a 0.5% forecast.

Annually we are 1.8% stronger than a year ago.

Increased consumer spending comes through as a clear trend in the June-quarter national accounts.

Despite last year’s tax cuts and February’s rate cuts, for a while it seemed consumers were more interested in saving than spending.

We estimated around 70% of the extra income was being saved.

However, in the June quarter household spending rose 0.9%, led by a 1.4% rise in discretionary spending.

It’s not quite boom-time out there in retail land, but it’s the first real positive sign since early 2022 when inflation and rate hikes hit consumers hard.

As a result, the household saving rate fell from 5.2% to 4.2%.

Overall GDP would have been stronger had public investment not fallen by 3.9%, albeit from very high levels.

State governments may be finally showing some fiscal restraint.

GDP per capita positive again, but labour cost pressures remain

Since mid-2022 we have had nine quarters of negative GDP per capita growth and only two quarters of positive growth.

Today makes a third at 0.2%, so good news.

Less welcome, by the RBA at least, was a rise in real unit labour costs of 0.7% for the quarter, after a 0.2% fall in the previous quarter.

The RBA is expecting wages to grow by 3.3% this year and 3% next year, as measured by the Wage Price Index. Without going into a detailed description of the pros and cons of various wage measures, the RBA would like to see real wages closer to productivity.

Any signs that wages are settling down nearer 3.5% than 3% would mean a very cautious RBA.

Market reaction and what’s next

Although there are the usual caveats in GDP numbers, the market viewed today’s numbers as a positive sign for growth, moving three-year yields around 10 basis points higher (3.55% from 3.45%).

Rate-cut expectations have moved from 100% chance of one cut by November to 90%.

Terminal cash expectations are now 3.15% from nearer 3% last week.

It does all feed into the idea that the RBA has time and optionality on its side.

If the consumer gets more confident from here, some may ask if any more rate cuts are needed.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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