Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses the growth rate.
The Australian economy expanded by just 0.1% in the March 2024 quarter as measured by the Gross Domestic Product (GDP) release today. This was worse than consensus & our forecast for a 0.2% rise. On an annual basis, GDP expanded just 1.1%yoy (from 1.6%yoy last quarter), which is the slowest rate of annual growth since the early 1990s recession (outside of the pandemic years). To put this figure into context, population growth over the last year was running at more than double that pace at 2.5%; and a long run average growth rate for Australia is around 2.75-3%.
Source: ABS, AMP
In other words, living standard as measured by GDP per person have gone backwards, falling for the fifth consecutive quarter (-0.4%qoq in 1Q24), or -1.3% over the year, which is also the worst decline since the early 1990s (outside of the pandemic).
Source: ABS, AMP
In this quarter, GDP growth has been held up by government consumption, household spending on essentials and a buildup of inventories. In particular,
- Household spending rose 0.4% with the bulk of the rise from essential goods & services, in particular electricity and utilities (+8.2%qoq which is partially due to higher electricity usage in the summer months), food (+2%) and rent (+0.4%). Discretionary spending remains below the historical average level, hovering around 0 in annual terms. That being said, discretionary services such as transport (+10.6%qoq), recreation & culture (+2.2%) and eating out (+8.1%) rose this quarter; driven by an increase in air travel on some new routes to Asia & higher attendance at sporting and music events (the temporary Swift lift!). Looking forward, as households’ savings buffers continue to be drawn down (the household savings ratio actually fell to just 0.9% of income this quarter), spending is likely to remain weak in the near term.
Source: ABS, AMP
- Government spending continued to offset the weakness in household consumption, rising 0.6% over the quarter or 4.6% over the year, driven by growing benefits spending on medical services & state-level energy bill relief payments. Public investment, on the other hand, is contracting (-0.9%qoq).
- Residential investment is still very lacklustre, falling for the third consecutive quarter at a -0.5%qoq or -3.4%yoy pace.
- Meanwhile private business investment, which has held up a bit better in this cycle so far, fell 0.8% over the quarter, due to a large 4% drop in non-residential building construction. Overall, growth in private investment is still reasonable at 3.6% annual pace, but this has slowed down significantly throughout the past twelve months.
- A buildup in inventories contributed 0.7% percentage point to GDP growth, as some wholesale and retail trade inventories were rebuilt after the rundown last quarter. Mining inventories also rose as production increased more than demand.
- Offsetting the buildup in inventories was a 0.9 percentage point subtraction from net exports, with imports rising 5.1% while exports only rose 0.7% due to lower coal, rural goods, and tourism exports (foreigners visiting Australia). The large rise in imports is similar to the consumption trend this quarter, with rises in consumption, capital goods as well as transport services, though the ABS noted that travel services (Aussies traveling abroad) actually fell because travellers are reducing their overseas spending for the past 2 quarters.
Productivity (aka output per hour worked) barely changed this quarter and over the last year, but it has improved from being negative. However, the improvement has been driven by falling hours worked in the economy, especially in the market sector. Productivity growth helps the RBA with reining in high inflation because it slows real unit labour costs. In addition the falling number of hours worked is a sign that the labour market continues to weaken.
Source: ABS, AMP
Similarly, real household disposable income growth remains weak but has improved slightly, up by 1.5% over the year to March. While the drag from income tax and inflation eased slightly, the mortgage interest burden continued to pick up, rising to 5.5% of gross income as more borrowers came off fixed rate loans. The total wages bill is also not rising as fast as in previous quarters, rising just 1% over the quarter which is the smallest growth since September 2021 – another sign of the slowing labour market.
Source: ABS, AMP
Source: ABS, AMP
The GDP data is a delayed series and is not a forward-looking signal for the economy. But it is still the most comprehensive snapshot of the Australian consumers, government spending, and businesses. In March 2024, households were clearly still burdened by high taxes, inflation, and rising mortgage payments which translated to declining savings rate & low discretionary spending which we have seen in the past year. Other sectors are also starting to slow down with very subdued activity in dwelling construction, lower public and private investment, and slowing export growth. In aggregate, annual GDP growth of 1.1% is lower than the RBA forecast of around 1.3%. Coupled with further signs of weakness in the labour market – evidenced by declining hours worked and the wages bill in this release, we continue to think that there will be scope for a rate cut later this year, as slowing economic growth leads to lower inflation and the RBA attempts to walk the fine line of avoiding a recession in Australia.
Governor Bullock’s comments today before the Senate Economics committee largely reiterated her guidance from the May RBA meeting and press conference and do not alter our assessment regarding the interest rate outlook. Particularly, with economic growth now running below the RBA’s forecasts.
Ends
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