The return of overseas tourists and international students is behind hopes that Australia should avoid a recession in 2023, despite the economy weakening as local families reduce spending.

A massive slowdown in the Australian economy is occurring as the cost-of-living crisis and record rate hikes cause a sharp fall in non-essential consumer spending, economists said.

Official figures on Wednesday revealed the weakest economic growth since the Delta lockdown in 2021, with GDP rising 0.5 per cent in the December quarter and by 2.7 per cent on the year.

The result was driven by a sharp fall in consumption growth, which plunged to 0.3 per cent on the back of a 1.5 percentage point decline in spending on discretionary goods in the period.

“The slowdown is on,” BIS Oxford Economics’ head of macroeconomic forecasting Sean Langcake said.

But a lift in overseas tourism and an influx of international students into Australian universities since the end of COVID-19 lockdowns is helping to prop up growth, prompting optimism among economists.

Services exports rose 9.8 per cent in the quarter, driven by a big 18.9 per cent spike in travel, the ABS data revealed.

Boost to GDP

EY chief economist Cherelle Murphy said overseas students and tourists were the main reason that consumption didn’t go backwards, citing their spending on transport, hotels and restaurants.

“Students and tourists flocked back to Australia in 2022 boosting Australia’s GDP, while domestic spending slowed in response to the Reserve Bank’s rate hikes,” Ms Murphy said.

Indeed APAC economist Callam Pickering was also buoyed by the rise in international travel, saying additional population growth would be key to Australia avoiding a recession in 2023.

“If we do avoid a significant downturn, it’s going to be driven by that additional immigration, including students coming to Australia,” he said.

Tourists are giving Australia a fighting chance. Photo: Getty

Families squeezed

The growing contribution from tourists and international students to economic growth contrasts with the diminishing role from households, which are under pressure.

Families were spending less on everything – from recreation and culture (-1.4 per cent); to clothing and footwear (-2.7 per cent); and household equipment (-1.2 per cent) – in the period.

It’s both a reflection of higher prices for these goods and services as inflation soars and the squeeze that rate hikes are applying to budgets, Mr Pickering said.

“The economic recovery from the pandemic has been driven by the household sector, but it has run out of steam,” Mr Pickering said.

“Households have come under a lot of pressure due to cost-of-living pressures, and that’s starting to weigh on their spending behaviour.”

Rate rises still coming

The latest figures haven’t changed expectations that the RBA will pass on at least two more rate hikes in early 2023, particularly because the inflation rate remains too high.

The RBA wants a slowdown in consumer spending so that businesses would find it harder to pass on further price hikes, therefore reducing inflation back to its targets.

But it’s still a delicate balancing act because if household consumption slows too much it could tip the economy into a recession where economic growth starts to go backwards repeatedly.

“The risks for the household sector are pretty large,” Mr Pickering said.

“You can come up with a scenario where household spending falls over, and the economy is left in a rough state.”

This is where immigration will be important, Mr Langcake said, because more people generally equals higher economic growth.

“Population growth makes it hard to get a recession unless there’s a big bang event,” he said.

Wednesday’s figures reveal that despite the large rise in tourism, the sector still has a long way to recover with sales still about 40 per cent below pre-pandemic levels.

“Exports of travel services were more than double levels of a year ago and the highest since March 2020, although still below normal levels,” Ms Murphy said.