Subdued growth for SA, while cost of living crisis eases

Household spending is expected to strengthen in 2024/25, but a fall in the size of the winter grain crop will hold back growth in gross state product.

Economists from the University of Adelaide say that South Australian households, and households around the nation, have faced unprecedented cost-of-living pressures in recent years, with prices rising well ahead of incomes.

They estimate that South Australian households’ real per capita disposable incomes fell by 2.2 per cent in 2023/24 after a substantial fall in 2022/23. Households have adjusted to the pressures on their budgets by reducing spending, and especially discretionary spending, and also by dissaving — spending more than has been earned — in the last couple of years.

The South Australian labour market has held up well, in spite of the weakness in activity. Employment has grown solidly through the last year and the unemployment rate is low by historical standards.

Fortunately, there are now signs that we have seen the worst of the cost-of-living pressures. National data shows that recent wages growth has outpaced increases in consumer prices. With inflation slowly moving closer to the Reserve Bank of Australia’s target band, a foundation is being laid for a recovery in household finances. The speed of the recovery depends on the restoration of stronger productivity growth.

Key highlights from the SACES Economic Briefing Report include:

• Global growth remains stable but lacklustre due to high levels of capacity utilisation and the dampening effect of interest rate rises in 2022 and 2023. While moderate global growth is expected to continue into 2025, there is a risk that the global economy will be undermined by tit-for-tat tariff and other trade measures which would hinder trade, decrease productivity and raise costs to global consumers.
• Efforts to reduce inflation in many countries have been successful and major central banks have started to reduce official interest rates.
• The Australian economy is growing at its slowest pace since the recession of the early 1990s, leaving aside the unusual situation during the pandemic. Domestic demand remains subdued due to weakness in household spending. Overseas trade has also acted as a drag on growth with exports falling.
• South Australia’s economic slowdown in 2023/24 was driven by weakness in private sector demand, especially household spending. Government spending grew strongly and provided support to activity.
• There were signs of stronger growth in final demand for the State through the middle of 2024, but household spending remains weak due to persistent cost of living pressures.
• South Australia’s labour market remains resilient in spite of subdued trends in production and spending. Employment has risen strongly through the year, and while the unemployment rate has ticked up to 4.1 per cent it remains near its record low of 3.8 per cent.
• Although construction activity, business investment and international exports have not shown much improvement in South Australia over the past year, they remain at historically strong levels.
• Exports of barley and wine to China have surged following the removal of tariffs.
• South Australia is exposed to a potential US-China Trade War as these two nations are the State’s largest export destinations for goods. Recently, China has taken 25 per cent of South Australia's goods exports and the United States 12 per cent. In addition, fall out in other markets would flow through to South Australia.
• Agricultural output is expected to be weaker this year. Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) projects that South Australia’s winter crop production will decline by 35 per cent to 5.6 million tonnes in 2024/25 due to less favourable seasonal conditions. 

Mr Jim Hancock, SACES Executive Director at the University of Adelaide, says the findings of the report reveal that policy makers are in a tricky position.

“Policy makers face a challenging balancing act. They must bring inflation under control to secure the long-term foundations for investment and growth while providing relief to households enduring severe cost-of-living pressures,” Mr Jim Hancock says.

“All this must be achieved without causing significant disruptions in the labour market.

“Over the last couple of years policy makers have been largely successful in reducing inflation and maintaining near-full employment. This stands in stark contrast to past episodes where inflation control came at the cost of painful increases in unemployment.

“The challenge now is to relieve cost of living pressures and restore income growth.”

The SACES Economic Briefing Report is delivered to Corporate Members from the SA business, government and not-for-profit community.