Government spending supporting the Australian economy

“Today’s national accounts data reveals the government is providing life support to the Australian economy,” said Innes Willox, chief executive of the national employer association Ai Group.

Real GDP grew at 0.8% pa on an annualised basis in the September quarter, below forecasts and market expectations.

“The data shows much of the private sector faces recession-like conditions. It is only a flood of government spending in recent months that is masking the true picture in the broader economy,” Innes said.

Several industries – including mining, manufacturing, wholesale trade, accommodation and food – reported contracting output on an annualised basis. This was compensated by higher growth in non-market sectors – education, healthcare and public administration – which are all heavily driven by government spending.

In these government-connected sectors, output increased at a 2.5% pa rate during the quarter. But in the market sector performance was a much weaker 0.8% pa. This points to the persistence of weak business conditions facing many branches of the private sector.

The Australian Industry Index, released today, points to continuing weak conditions in manufacturing during October and November, so challenging conditions continued beyond the third quarter.

Ai says that the economy is increasingly dependent on government spending. Public sector final demand accounted for 28.0% of GDP in the last quarter – the highest level since the series began in 1985.

The labour market has also become dependent on government support. While labour use in the economy grew by 1.7% over the last year, it was a flat 0.1% in the market sector. It would have begun to rebalance to match broader business conditions were it not for the large uptick in government-supported employment.

The slowdown in private business investment, which has fallen from a 6.7% to 1.3% pa growth rate over the last year, is of particular concern. Sluggish growth in business investment augurs poorly for a durable economic recovery in 2025.

Unfortunately, this has perpetuated Australia’s longstanding productivity problems. Labour productivity decreased 0.7% in the year to September and remains 1.6% lower than it was before the pandemic.

“An economy increasingly dependent on government spending in lower-productivity industries is simply not sustainable,” Innes Willox said.

“While government spending is keeping our head above water, it is concerning that the private sector is performing so weakly.

“To ensure momentum, it is essential that policy supports an increase in growth, investment and employment in the private sector,” Innes said.