Australian Government Increases Infrastructure and Defence Spending

By Wayne Cole

SYDNEY (Reuters) – Australia's government ramped up spending on infrastructure and defence in the third quarter, contributing significantly to economic growth as consumers struggled with high borrowing costs.

The increase in government spending helped to offset a reduction in inventories and a lackluster trade performance, likely buoying the overall economy during this quarter.

Figures for the third-quarter gross domestic product (GDP) are due on Wednesday, with expectations of modest growth at 0.4%, despite consumers being hesitant to spend, even in light of substantial tax cuts boosting take-home pay since July.

Market analysts projected annual growth to moderately rise from 1.0% to 1.1%, indicative of the sluggish pace typically seen during pandemics and recessions.

The public sector emerged as a key driver, with spending at state and federal levels surging by 2.4% in the third quarter to reach a record A$183.3 billion ($118.63 billion).

Specifically, capital spending on defence alone saw a 35% increase from the previous quarter, while state investment in capital projects rose nearly 9%.

The Australian Bureau of Statistics estimated that this government spending would contribute approximately 0.7 percentage points to GDP in the third quarter, marking the largest boost since the pandemic-related stimulus efforts.

This increase in spending helped counteract disappointing trade performance, which saw Australia's surplus on goods and services shrink to the smallest level since mid-2018 due to declining commodity prices.

Minor contributions to growth were expected from business investment and housing, whereas a reduction in inventories placed significant pressure on performance.

The Reserve Bank of Australia's (RBA) policies are seen as a primary factor for this modest performance, maintaining the cash rate at a 12-year high of 4.35% for the past year with no signs of easing soon.

Headline consumer price inflation slowed to 2.9% in the third quarter, primarily driven by government rebates on electricity bills. However, core inflation remained more persistent at 3.5%, above the RBA's target range of 2% to 3%.

Last week, the central bank indicated that it would not ease rates until it was confident inflation was trending back towards the target midpoint. Consequently, market predictions suggest only an 8% chance of a rate cut at the next RBA meeting on Dec. 10, and just a 26% likelihood for the February meeting.

($1 = 1.5461 Australian dollars)