Stretched Australian households cast doubt on central bank's outlook

Sydney

AUSTRALIANS' reluctance to spend in the middle of a property slump is dragging on economic growth and casting doubt on the central bank's outlook, making the prospect of an interest-rate hike even more distant.

Doing damage on Wednesday was data showing that the Australian economy grew just 0.3 per cent in the third quarter, half the pace forecast by analysts. Downward revisions to the past meant annual growth slowed to just 2.8 per cent.

"Today's result was underwhelming," said CBA economist Gareth Aird. "Consumer spending remains the key risk given weak income growth and dwelling prices that look set to continue deflating in Sydney and Melbourne. Trend-like growth won't be generating much in the way of upward pressure on prices and wages. Monetary policy will stay unchanged for the foreseeable future."

The Reserve Bank of Australia (RBA) has already kept rates at record lows of 1.5 per cent since mid-2016 and the futures market implies only a one-in-five chance of a hike by Christmas next year.

The outlook boosted bond prices, with yields on 10-year debt dropping to a 12-month low of 2.48 per cent. A few weeks ago they had been as high as 2.83 per cent. Three-year bond futures climbed four ticks to 98.000, implying a yield of just 2 per cent.

The data are a blow to the RBA narrative of record-low interest rates fuelling economic growth of around 3.5 per cent this year and next to drive higher wages. It's now contending with a less robust expansion at a time when house prices are dropping the most since the global financial crisis. That may prompt consumers to further rein in spending, as could a looming election.

Citigroup economist Josh Williamson said the RBA is likely to revise down its 2019 growth forecast in the next update in February. Shane Oliver at AMP Capital Investors Ltd scrapped his forecast for a rate increase and now predicts the central bank will cut in the second half of next year.

The household savings ratio fell to 2.4 per cent from a revised 2.8 per cent; household spending growth slowed to 0.3 per cent from 0.9 per cent in the previous quarter. BLOOMBERG, REUTERS