‘Encouraging progress on inflation’: Spending spree gives weak economy a healthy boost

The worst is likely over for the Australian economy as analysts tip a modest improvement in the quarterly pace of growth.

A prolonged fight against rising prices has taken a toll on the economy, leading to a series of weak gross domestic product readings.

Wednesday’s September national accounts are expected to show an economy still hurting but tentatively returning to health.

National Australia Bank was predicting the economy to expand by 0.3 per cent over the quarter, a minor improvement on June’s 0.2 per cent.

Such a result would take the annual rate to a meagre 0.9 per cent.

Figures released on Monday showed businesses were running down inventories, which NAB head of markets economics Tapas Strickland said would weigh on September quarter economic growth.

But strong government spending revealed on Tuesday should counter the drag of inventories, he said.

Treasurer Jim Chalmers said Australia’s economy was weak due to global uncertainty, higher interest rates and cost-of-living pressures and it would be even softer without public demand.

“Most of this was states, and the biggest part of the Commonwealth’s share was defence spending,” Dr Chalmers said.

“We have been making encouraging progress on inflation without ignoring the serious risks to growth in our economy.”

With inflation easing and the economy weak, borrowers are hopeful the Reserve Bank of Australia will soon start lowering interest rates.

While some economists are still tipping a February start to rate cuts, the central bank has been focused on signs of strength in the economy - namely the jobs market - which has other analysts predicting a longer wait.

Nomura Australia economists Andrew Ticehurst and David Seif were encouraged private final demand – consumer, dwelling and business investment – was looking a little stronger heading into Wednesday’s GDP figures.

“It is now just over a year since interest rates were last hiked, and some of that impact may be starting to fade,” they wrote in a note.

“However, the report should also highlight that growth remains quite uneven across sectors and heavily influenced by rising government spending.”

The economists’ pick for a 0.5 per cent economic expansion through the September quarter would represent an economy past its weakest point in terms of quarterly growth momentum.

Yet in the context of interest rate settings, improving growth should be viewed alongside easing wage and inflation pressures, they said.

“We still think the RBA can deliver a rate cut in February – we concede the risk tilts to a later kick-off – and the rationale is tilting more towards lower inflation allowing for some monetary easing, rather than weak momentum requiring it,” Mr Ticehurst and Mr Seif said.