The economy's rebounding - So why no rate relief?

For much of the past two years, Australia's economy has been stuck in low gear. Growth has been sluggish, households have been cautious, and there has been constant debate about whether the country was flirting with a recession. Last week's National Accounts from the Australian Bureau of Statistics (ABS) gave us the clearest signal yet that things may finally be turning around.

Gross Domestic Product (GDP) rose by 0.6 per cent in the June quarter and by 1.8 per cent over the year, the strongest annual outcome since September 2023. Not only is this better than we've seen for some time, but it also came in ahead of the Reserve Bank's (RBA) own forecast of 1.6 per cent.

When you add in the fact that GDP per capita, a measure of output per person, grew for the first time since early 2023, it's a sign that Australians are, on average, actually starting to feel a bit better off. That matters, because per capita measures cut through the population growth effect and tell us how households themselves are faring.

Household spending is driving growth again

The real story of this latest data is household consumption. For the June quarter, consumption rose 0.9 per cent, the biggest lift since late 2022, while over the year it was up 2.0 per cent. This was significantly stronger than the RBA's forecast of 1.5 per cent.

That half a percentage point difference might not sound huge, but in economic terms it is a sizeable gap. It shows that households are spending more freely than the central bank expected.

What's particularly encouraging is that it's not just essential spending that has gone up. Discretionary spending (dining out, travel and entertainment) is also growing at its fastest annual pace since early 2024. If households were still feeling deeply squeezed by higher living costs, we wouldn't be seeing that.

In short, households are showing renewed willingness to spend, and that's lifting the economy at a time when it desperately needed a boost.

The housing market is heating up again

Another indicator of this renewed confidence is housing. Property is a high-cost, high-commitment purchase, so when people feel uncertain, housing activity typically slows. But the latest data shows that momentum is picking up again.

According to Cotality's Home Value Index, national prices rose 0.7 per cent in August, the fastest monthly increase since last year. Over the year, prices are up 4.1 per cent, with every capital city recording gains. Darwin has been the standout with growth above 10 per cent, while Melbourne has been more subdued at just 1.4 per cent.

Importantly, these increases occurred before the full effect of the August interest rate cut had time to flow through. That means market sentiment and prices are likely to see further support in coming months.

For homeowners, rising property values provide a confidence boost and improve equity positions. For potential buyers, however, it adds further pressure in already stretched markets.

Stronger growth means fewer rate cuts

Here's where the story gets complicated. A stronger economy and more confident households are undeniably positive developments. But they also have implications for interest rates, and not the kind that most mortgage holders were hoping for.

Just a few months ago, financial markets were pricing in the possibility of two or three more 25-basis point cuts to the cash rate by year's end. Now, with the economy surprising on the upside, those expectations have been scaled back. At this stage, markets only anticipate one further cut in 2025, with the chance of another next year.

For borrowers, that means the dream of the cash rate falling below 3 per cent looks increasingly unlikely. While the RBA will want to avoid tightening financial conditions unnecessarily, the stronger growth and rising spending reduce the urgency for deeper cuts.

What it means for homeowners

As a homeowner with a mortgage, I understand why so many people were hoping for more rate relief. The past two years have been tough, with cost-of-living pressures biting and repayments eating up a large chunk of household budgets.

But the latest economic figures suggest that we're unlikely to see as much mortgage relief as once hoped. While the August cut provided some breathing room, the RBA will be cautious about cutting further if the economy is already gaining momentum.

For households, this means planning for a future where rates stay higher for longer than expected. It also means that rising property prices could put additional pressure on buyers trying to get into the market.

The silver lining is that a stronger economy typically supports jobs, incomes and overall financial stability. While mortgage repayments may remain elevated, they are being balanced by improving employment prospects and rising household confidence.

The labour market wildcard

The one big variable that could change the interest rate outlook is the labour market. So far, employment has remained strong, and the unemployment rate is still low. If that were to shift meaningfully, say, if job losses started mounting, the RBA may be forced to act with additional cuts to support demand.

But until that happens, the central bank will likely tread cautiously. With growth improving, spending rising, and property values climbing, the case for aggressive rate cuts just isn't there.

The bigger picture: confidence returning

For me, the most important takeaway from all of this is that confidence is finally returning to households. After a prolonged period of weak growth, cautious spending and high mortgage stress, Australians are beginning to open their wallets again. That shift is critical because household spending makes up around half of all economic activity.

This doesn't mean the road ahead will be smooth. Rising prices for essentials are still hitting budgets hard, and many families remain stretched. But the fact that discretionary spending is growing suggests households feel just confident enough to move past pure survival mode.

The latest GDP data is a turning point. It shows that the economy is stronger than expected, households are more confident, and the housing market is regaining momentum. That's good news after a period of weakness, but it also means the Reserve Bank has less reason to deliver multiple rate cuts.

For homeowners, this is a mixed bag. Stronger growth and rising property values are encouraging, but fewer rate cuts mean higher repayments for longer. The challenge will be managing household budgets carefully while the economy finds its footing.

Cameron Kusher is View.com.au's most senior economic contributor and one of Australia's most respected economic researchers. Prior to joining View.com.au he has held various positions at REA and spent 11 years at CoreLogic/Cotality where has was Head of Research for Australia. Follow Cameron's insights and consulting work at Oz Property Insights Substack.