In short: 

Australia's economy recorded its weakest annual growth rate in decades in the September quarter, outside of the pandemic.

Private demand was negative, with overall economic activity being propped up by government spending.

What's next?

The Reserve Bank Board will hold its final meeting of the year next week.

Australia's economy grew by 0.3 per cent in the September quarter, and 0.8 per cent over the year, according to the Australian Bureau of Statistics (ABS).

It means the economy's annual growth rate has weakened even further from the extremely weak growth recorded in the June quarter.

Some economists were expecting the annual rate of growth to pick up from 1 per cent, but Wednesday's figures show the economy has continued to slow down since the middle of the year, to an anaemic 0.8 per cent.

As recently as three months ago, Treasurer Jim Chalmers was warning that the Reserve Bank's 13 interest rate rises were "smashing the economy".

"The weakness in GDP growth adds to the case for looser monetary policy," Marcel Theiliant of Capital Economics said.

"We're sticking to our view that the Bank will start a short easing cycle in the second quarter of next year," he said.

Tony Sycamore, IG analyst, said the chances of the Reserve Bank cutting interest rates by 0.25 percentage points in April 2025 had now risen to 80 per cent, according to market participants.

But accompanying the weakness in growth, Wednesday's figures show living standards picked up noticeably in the September quarter, because the government's stage 3 tax cuts and energy rebates helped to lift peoples' disposable income.

However, that boost to incomes did not translate into more spending.

"On average, households responded by saving more, rather than increasing consumption," Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, said.

"We expect GDP growth will slowly pick up in the coming quarters. The fundamentals for an improvement in consumption growth are favourable.

"But this improvement will be unspectacular, with the economy set to endure below trend growth in the near term while capacity constraints continue to bite," he said.

Overall, analysts say the weak growth numbers mean there's now a question mark hanging over the RBA's forecasts.

The RBA was expecting annual growth to pick up to 1.5 per cent by the end of this year, so annual growth of 0.8 per cent at this stage in the cycle suggests that forecast may be difficult to achieve.

Public investment helping the economy to stay afloat, a legacy from the pandemic

The ABS data show economic activity in the September quarter was heavily reliant on state and federal government spending.

After three consecutive quarterly falls, public investment in the quarter was the largest on record.

It comes after RBA governor Michele Bullock last week pushed back against the argument that there was too much government spending in Australia at the moment, saying it was helping to keep the economy on an "even keel."

She said the private sector was growing "very slowly" currently, and government spending was providing crucial support.

"If it wasn't there, if it wasn't filling that gap, then things might well be much worse in terms of the employment market," Ms Bullock told a Sydney audience.

In that vein, Wednesday's ABS data show general government investment rose 6 per cent in the September quarter, driven by defence equipment imports and investment in hospitals and roads.

In fact, national defence investment increased by a massive 35 per cent.

State and local public corporations investment rose 8.8 per cent due to investment in roads and renewable energy.

EY chief economist Cherelle Murphy said the ABS data clearly showed the public sector was "underwriting the Australian economy."

"Never before have governments pumped so much into the economy via rebates, tax cuts, infrastructure, health and disability support and defence," she said.

"Government spending and investment climbed to a record high share, at 28 per cent of GDP in the September quarter," she said.

"Yet the economy managed just 0.8 per cent growth over the year.

"Federal and state governments continue to spend up big. It's hard to find a government in Australia that doesn't have a record-high capital program over the next four years.

"This is largely thanks to a legacy of infrastructure investment to support the economy through the pandemic," she said.

Anaemic growth complicates the Reserve Bank's inflation challenge

Ivan Colhoun, CreditorWatch Consulting chief economist, said there was obviously a debate among economists about whether this level of government spending was a good or bad thing.

He said the "good side" argued that government spending was preventing much weaker growth (or recession), which was clearly true, while the "bad side" argued it was keeping inflation and thus interest rates higher, and reflected excessive expenditure on the National Disability Insurance Scheme (NDIS), which was partially true.

He suggested the debate would continue.

"I'm unconvinced about the government spending/inflation linkage except theoretically, while other government spending to an extent reflects defence spending, roads and other infrastructure spending," he said.

"I also consider the NDIS an important social policy that at the same time clearly requires significant tightening of aspects of its expenditure," he said.

But regardless of that debate, Alex Joiner, chief economist at IFM Investors, said an annual growth rate of 0.8 per cent for Australia's economy was a significant miss for most economists' official forecasts.

He said it marked a "new cyclical low" that hadn't been seen (outside the pandemic) since the 1990s recession, and it could make things difficult for the RBA.

"The RBA's forecast to the December quarter 2024 is 1.5 per cent year-on-year," Mr Joiner wrote on LinkedIn.

"This implies that a 0.8 per cent quarter-on-quarter outcome in the December quarter is required to meet this target. It will need a material improvement in growth to hit this forecast and the risk is [the RBA] may need to downgrade its near-term growth forecast.

"Weak growth highlights the need for interest rate cuts but this is difficult for the RBA to deliver, given inflation remains uncomfortably high," he warned.