On Wednesday 4 September, we learnt that the Australian economy was in a slump: it hardly grew over the June quarter, with GDP up a barely-there 0.2%, largely on the back of record federal government spending. Annual economic growth was 1.0% (down from 1.3% in March). While the figures were in line with market expectations, the share market and the AUD both were weaker in response.
Source: Australian Financial Review
Factors causing the economy to slow included weak consumer spending, and a decline in export revenue as the price of iron ore and coal has fallen.
Australia’s growth rate in the quarter was the weakest since 1991-1992, excluding the pandemic, according to the Australian Bureau of Statistics (ABS). Gross domestic product per head fell 0.4%, the sixth consecutive quarterly decline.
Jim Chalmers, Australia’s Treasurer, said: “The figures today are soft and subdued but that’s what we expected.”
Some of the key points:
- Household consumption fell -0.2% quarter on quarter (qoq) and +0.5% year on year (yoy), marking the largest quarterly decline since the GFC in 2008 (excluding the COVID lockdowns). The outcome was well below expectations, with declines across discretionary categories such as transport, hospitality and clothing offsetting increases across household goods, utilities and education. The ABS noted the fall in 2Q2024 discretionary spending followed “a relatively strong result in the March quarter, which included a number of sporting, gambling and music events.”
- Business investment was flat, with a fall in equipment investment offset by growth in non-dwelling construction and marginally higher dwelling investment. Public demand rose +0.8% qoq, driven by firm public consumption. Inventories subtracted from GDP growth, roughly offsetting the tailwind from net exports.
- The household savings rate was stable at 0.6% (prior quarter revised down from 0.9%), with slower growth in household consumption matched by slower growth in household disposable income. Adjusting for inflation, real household disposable income was broadly flat in the quarter but continued to contract in per capita terms. In terms of wages, growth in average earnings per worker slowed, with year-on-year growth at +3.3% yoy.
- On the income side of the accounts, private non-financial corporate profits fell -2.8% qoq (-3.8% yoy), while growth in compensation of employees was at 6.3% yoy. Labour productivity fell -0.8% qoq, although the year-on-year rate rose +40bps to +0.4% yoy. The weakness in productivity kept growth in nominal unit labour costs elevated +5.8% yoy.
- The terms of trade declined -3.1% qoq alongside weaker commodity export prices.
GDP remains anaemic
Source: Goldman Sachs
Real household income growth subdued
Source: Goldman Sachs
Economic growth has slowed sharply since the Reserve Bank of Australia (RBA) started raising interest rates in May 2022 to subdue inflation. The RBA lifted the cash rate 13 times from 0.1% to 4.35%, pushing up mortgage costs and reducing cash for discretionary spending.
The RBA’s efforts have worked, with inflation falling from 8.4% in December 2022 to 3.5%, but the RBA expects it to take another two years to get back to the mid-point of its 2-3% target range. Wednesday’s national accounts figures are unlikely to bring forward interest rate cuts to this year given Governor Bullock’s ongoing concern about persistently high inflation.
