SYDNEY – Australia’s economy unexpectedly slowed sharply in the three months through September as consumers hunkered down in the face of rising borrowing costs while trade detracted from growth.

Gross domestic product (GDP) advanced 0.2 per cent from the prior quarter, slower than economists’ estimate of a 0.5 per cent gain, Australian Bureau of Statistics (ABS) data showed on Dec 6.

From a year earlier, the economy grew 2.1 per cent from a downwardly revised 2 per cent.

“Government spending and capital investment were the main drivers of GDP growth this quarter,” ABS head of National Accounts Katherine Keenan said in a statement.

“Household spending was flat in the September quarter.”

With annual growth slowing from a decade average of 2.4 per cent, the data is likely to ease concerns about demand-driven inflation pressures.

That suggests the Reserve Bank of Australia (RBA) can remain in a holding pattern for a little while in order to assess the economy.

The RBA forecasts a further slowdown in response to its 4.25 percentage points of rate hikes since May 2022.

The latest staff forecasts predict the economic expansion will ease to 1.5 per cent by the end of 2023 before picking up to 2 per cent in late 2024.

Bloomberg Economics expects growth to remain subdued, as the cumulative impact of higher rates damps household demand and housing-related activity.

Australian households are already facing a squeeze with Wednesday’s data showing the savings ratio declining to the lowest level since 2007. It slumped to 1.1 per cent, the eighth straight quarterly decline, from a downwardly revised 2.8 per cent.

“Increased interest paid on home loans and inflationary pressure on households” were likely factors behind the fall in the household savings ratio, Ms Keenan said.

Household spending was flat in the third quarter, while government expenditure jumped 1.1 per cent, adding 0.2 of a percentage point to GDP.

The figures follow the RBA’s decision to leave rates unchanged at a 12-year high of 4.35 per cent at its last meeting of the year on Dec 5.

The cautious approach underscores a desire to hang on to some of the employment gains made during the Covid-19 pandemic.

Even so, economists ascribe about a 40 per cent probability of a recession over the next 12 months.

“Our concern remains that the RBA has tightened more than necessary, with a high risk of recession next year,” AMP chief economist Shane Oliver said ahead of the data release.

“The key risk remains consumer spending, where various indicators continue to point down.”

Most economists say the RBA has concluded its tightening campaign, though they acknowledge the risk of another hike in early 2024.

By comparison, financial markets expect the United States Federal Reserve to begin easing in 2024, while bets of rate cuts in Europe, New Zealand and Britain have also gained momentum.

“We expect to see some further moderation to annual growth over the year ahead,” treasurer Jim Chalmers said in a statement.

“In these difficult times, households are under acute pressure from the cost of living and the burden of higher interest rates.” BLOOMBERG