Australia's economy grows but real incomes going backwards

While the economy defied high interest rates and a tough global environment to expand by 0.4 per cent in the June quarter, output per person fell 0.3 per cent after declining by the same amount in the previous quarter, in what economists have described as a per capita recession, defined as two successive quarters of negative growth per person.

Highlighting the pressure families are under from rising living costs, real net disposable income, which takes account of inflation, contracted by 1.4 per cent and increased by just 0.2 per cent through 2022-23 and the household saving rate dropped to just 3.2 per cent - the weakest reading in 15 years.

The impact of this was clear in spluttering household spending, which increased by a meagre 0.1 per cent as high interest rates worked as intended by the Reserve Bank of Australia to crunch demand.

Families cut back sharply on discretionary purchases like entertainment, furnishings and other household goods and heavily trimmed their spending at hotels, cafes and restaurants. The major exception was new car sales, which jumped almost 6 per cent as orders delayed during the pandemic were fulfilled.

Treasurer Jim Chalmers admitted that high interest rates were hurting and the economy was set to "slow considerably".

"We know that people are under pressure from [the] rising cost of living and higher interest rates," the Treasurer said.

"The economy is being buffeted by two things - by the slowdown in China as part of broader global economic uncertainty and also the impact of these interest rate rises.

"We do expect growth in the economy to be relatively flat over the next 12 months or so."

Despite this, the Treasurer said there were also areas of strength, including rising wages, strong public and business investment, improving supply chains and a 12.1 per cent jump in services exports, largely driven by international students and tourism.

After reaching 6 per cent in the September quarter, annual gross domestic product growth slowed to 2.1 per cent last quarter, Australian Bureau of Statistics figures show.

"This is a steady and sturdy result in difficult circumstances," Dr Chalmers said.

The sources of growth have shifted as the post-pandemic surge in household spending has petered out and is being replaced by exports and investment, particularly by state governments.

According to the national accounts, public investment soared 8.2 per cent as governments poured money into large-scale transport, health and education projects while exports rose 4.3 per cent, including a 18.5 per cent surge in tourism and international education.

Betashares chief economist David Bassanese said monetary and fiscal policy were at odds, arguing that while interest rates were working to slow consumer spending, public infrastructure programs were likely exacerbating labour and materials shortages, adding to inflation pressures.

"While federal and state government commitment to infrastructure is usually a welcome development, the timing of this investment is unfortunate, as it runs contrary to the RBA's efforts to slow the economy and bring down inflation," he said.

Opposition treasury spokesman Angus Taylor said the economy was "shuddering to a halt".

"Australians, on a per person basis, are seeing a recession and there's a lot of pain," he said.

Mr Taylor accused the government of relying on an expanding population to support growth.

"Right now, their economic strategy seems to be a migration strategy, because that's the only thing propping up the economy," he said. "It's a dire situation."

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One of the Reserve Bank's big concerns has been the nation's weak productivity performance, and there was nothing in the ABS numbers to provide any reassurance.

Productivity fell by 2 per cent in the June quarter to be down 3.6 per cent from a year earlier, while the cost of labour to produce a unit of output climbed 3.2 per cent to reach an annual rate of 5.8 per cent.

But Dr Chalmers was unrepentant about growth in pay packets, saying "people are working more and earning more and that's what we want to see".

Australia's growth slowdown is occurring at a time of weakening economic activity in many parts of the world, though the outlook has improved in recent months, not least because of resilience in the US economy.

Instead, China has emerged as significant source of concern following a string of defaults by major property developers and falling property prices.

"The worst case in China is yet to be seen but we are quite concerned about it, to be frank with you," Dr Chalmers said.

"This is one of the things that we monitor most closely because a slowdown in China will be something that will impact our economy."

The latest growth update followed the RBA's decision on Tuesday to keep interest rates on hold at 4.1 per cent for a third consecutive month.