(Bloomberg) -- Australia’s economy surprisingly slowed sharply in the three months through September as consumers hunkered down and further depleted their savings in the face of rising borrowing costs and elevated prices.

Gross domestic product advanced 0.2% from the prior quarter versus economists’ estimate of a 0.5% gain, Australian Bureau of Statistics data showed Wednesday. From a year earlier, the economy grew 2.1% from a downwardly revised 2%. 

The slowdown was driven primarily by the interest-rate sensitive sectors of the economy such as residential construction and household consumption. The Reserve Bank kept rates unchanged at a 12-year high of 4.35% this week after hiking the previous month in a move that may draw scrutiny as growth slows.

“Australia’s economy is set to slow in 2024, as the full impact of the RBA’s 425-basis points of rate hikes hits households,” said James McIntyre at Bloomberg Economics who forecast today’s result. “Surging population growth has kept the economy out of recession so far, but a slowdown in migration flows could send GDP into reverse if the RBA keeps rates higher for longer.”

Today’s subdued data did little to move the Australian dollar and government bonds with expectations already baked in that the RBA is all but done in the current tightening cycle. 

The figures are likely to ease concerns about demand-driven inflation pressures, suggesting the RBA can remain in a holding pattern for a little while in order to assess the economy. 

The central bank predicts a further slowdown in response to its policy tightening between May 2022 and November 2023. The latest staff forecasts show the economic expansion will ease to 1.5% by year’s end compared with a decade average of 2.4%.

“Today’s data don’t close the book on further rate hikes, but they do make it harder for the RBA to justify further hikes without some stronger accompanying evidence that the inflation battle is stalling,” said Robert Carnell, regional head of research, Asia Pacific, ING

Wednesday’s data showed the household savings ratio declined to the lowest level since 2007. It slumped to 1.1%, the eighth straight quarterly decline, from a downwardly revised 2.8%. 

“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.”

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

Economists are ascribing about a 40% 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,” said Shane Oliver, chief economist at AMP Ltd. “The key risk remains consumer spending where various indicators continue to point down.”

Today’s GDP report also showed:

  • Non-dwelling construction rose 3.3%, adding 0.2 point to GDP
  • Compensation of employees rose 2.6%
  • Trade was the biggest drag, subtracting a total 0.6 point
  • Per capita GDP slipped 0.5% and real net disposable income declined 0.6%

--With assistance from Tomoko Sato.

(Adds comments from economists.)

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