An unprecedented further cut in interest rates to levels never seen before in Australia is now virtually certain as the national economy sputters with dwindling growth and disposable incomes slipping backwards.
Slower than expected growth of just 2.7 per cent for the year, outlined in the September quarter national accounts, immediately prompted Treasurer Joe Hockey to reassure Australians he would not order harsh new cuts in the forthcoming Mid-Year Economic and Fiscal Outlook nor in his second budget in May, admitting it would harm the economy and risk further falls in jobs growth and incomes.
"If we have revenue falls due to external factors we should not chase them down," he said. "New cuts to the budget would slow the Australian economy."
Outgoing Treasury Secretary Martin Parkinson said the figures were "a serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians."
The bleak outlook is both economically and politically complex for the Abbott government.
While it had been pursuing an austerity agenda, the risk of harming anaemic growth could now force a fiscal re-think delaying the 2017-18 time-table back to surplus, and a winding in or abandoning of cuts it has been unable to achieve anyway through a hostile Senate.
Mr Hockey told reporters his preference was for a good Christmas with high levels of spending...
With the government now desperate to underpin at-risk business and consumer confidence, Mr Hockey also promised 2015 would be better than 2014 and that 2016 would be better again.
"We want Christmas to be good for Australia, we want Australians to go out there and spend - not just for Santa Claus but for Australia, because increasing household consumption is good for the economy and that in turn will help create jobs for other Australians."
Yet with people's disposable incomes now stuck in negative territory for two successive quarters, there are concerns that to some, the situation will already feel like a recession, sending spending further down.
Australia's economy grew just 0.3 per cent in the first three months of the financial year, a low hit only once before in the past three years. The weak growth rates of 0.5 and 0.3 per cent in the June and September quarters follow much stronger growth rates of 0.8 and 1 per cent in previous two quarters. They suggest economic growth is weakening quickly, a prospect that alarms the Bank.
The central bank's board next meets on February 3. A cut in its cash rate from its present long-term low of 2.50 per cent to 2.25 per cent would take the typical discounted home loan rate below 5 per cent to 4.85 per cent, the lowest since 1970. It would slice a further $51 dollars off the monthly cost of servicing a $350,000 home loan.
The accounts show national income fell for the second successive quarter, slipping 0.4 per cent in September after slipping 0.3 per cent in June, enabling Labor's treasury spokesman Chris Bowen to claim Australia was in an "income recession", the first since the global financial crisis in 2009.
Income per capita shrank 0.8 per cent in September after shrinking 0.8 per cent in June. Household spending was flat after adjusting for inflation as consumers saved more in order to make up for lower real incomes.
On the release of the national accounts the Australian dollar dropped about half a cent to 83.92 US cents, the first time it has been below 84 US cents in four years. Betting on the futures market raised the implied probability of a rate cut in February from 13 per cent to 22 per cent.
Budget revenues are driven by nominal gross domestic product, unadjusted for inflation. It slipped 0.1 per cent in the quarter, indicating that budget revenues will be revised down further when the mid-year budget update is released in two weeks.
The government claims that Labor has blocked $28 billion of savings by blocking budget measures in the Senate.
Mr Hockey said although there would be few if any spending cuts in the budget update he would stick with his strategy of getting spending under control, removing red tape, and granting billions of dollars to the states to build roads.
"We expect the states to help us roll out this new productive infrastructure as quickly as possible," he said. "This will support growth and jobs in the short and medium term and lift our nation's productivity."
The accounts show the construction industry going backwards, subtracting 0.2 points from economic growth in the quarter. Financial and insurance services was the best performing industry, adding 0.2 points to economic growth.
NSW is the best performing state economy in terms of spending, boasting an increase of 1.3 per cent in the past three months. Spending in Victoria slumped 1.6 per cent.In The Age and Sydney Morning Herald