Australian GDP growth unexpectedly slowed to 0.2% in Q3 from 0.4% in Q2, the country’s Bureau of Statistics reported this morning. Activity was 2.1% higher than in the same month last year. It was the eighth consecutive increase in quarterly GDP, but the consensus was for faster growth of 0.5% in Q3. Government spending and investment were the main drivers of Q3 GDP growth. Government consumption spending rose 1.1%, driven by social benefits to households.
Defense also contributed to growth. A 1.1% increase in gross fixed capital formation was also supported by the activities of public corporations. Changes in inventories contributed 0.4% to GDP growth, but this mainly reflected falling exports. Net trade added a net -0.6% to growth. Household consumption was flat in Q3, although the household saving to income ratio fell for the eighth consecutive quarter to 1.1%, the lowest since Q4 2007.
The Q3 GDP release allows the RBA to maintain a cautious wait-and-see approach. The 2-year government bond yield fell 10 basis points this morning to 3.98%. The Aussie Dollar initially rose on positive risk sentiment, but the rally slowed after the release of the GDP data. AUD/USD is currently trading just below 0.66.
Spain, which currently holds the EU presidency, proposed a new framework aimed at reducing government deficits while leaving room for green and defense investments, Bloomberg reported, citing people familiar with the matter. The proposal would require countries to reduce their debt-to-GDP ratio by an average of 1 percentage point over an adjusted period if it exceeds 90% of GDP.
Countries with debt-to-GDP ratios between 60% and 90% would have to reduce their debt at half that pace. According to the report, countries would also have to build up a fiscal buffer of 1.5% of GDP, which is below the ECB‘s target of 3.0%, but would give governments room to finance the green transition and support the bloc’s military capacity. In the proposal, a cap on government spending could also be an important mechanism for reducing deficits.
