Australia's national accounts for the June quarter are due to be published by the ABS at 11:30am (AEST) today. A tightening labour market, rising inflation and the RBA commencing its rate hiking cycle were the main themes in the Australian economy in the June quarter. Consumer demand remained robust throughout and is expected to have driven a 0.9% quarter-on-quarter expansion in real GDP.
Conditions in the labour market strengthened considerably over the June quarter. Employment expanded by over 150k, lowering the unemployment rate to new half-century lows at 3.5%. Despite ongoing disruptions caused by elevated staff absences due to rising Covid cases and caregiving reasons, hours worked still lifted by more than 4% in the quarter. As a result, underemployment fell sharply to lows last seen in 2008 and labour force underutilisation was reduced to a 40-year low. This came alongside a rise in labour force participation to record highs.
Wages growth had continued to rise in response to the strength of the labour market, though increases in base wages were still contained running only a little above their pre-pandemic pace at 2.6% in year-ended terms.
Inflation pressures increased over the first half of the year driven by rising prices for fuel, new dwellings and groceries. The war in Ukraine had led to elevated prices across the global commodities complex, pushing up prices for oil and inputs required in food production. The flooding in New South Wales and Queensland had also disrupted supply chains for local producers, leading to higher prices for fruit and vegetables. Ongoing shortages in materials and labour were driving up home building costs.
With inflation running well ahead of wages growth, real household income continued to fall, causing consumer sentiment measures to weaken to very low levels. The RBA also started hiking interest rates in May with a 25bps increase before stepping up to a 50bps rise in June. Household demand remained resilient to these headwinds with the strong labour market and accumulated savings continuing to support spending. Despite another strong rise in retail prices (1.7% in Q2), retail volumes posted a larger increase than in Q1, rising by 1.4% in the June quarter. Discretionary categories were particularly strong rising by 2.8% on the back of strength in dining out (8.6%) and clothing and footwear (3.9%), with these gains reflecting the wider reopening of the services sector and eased travel restrictions.
Materials and labour shortages remained a pressing constraint on activity in the construction sector. Residential construction activity contracted sharply by almost 7% in the quarter on these pressures, slowing progress in working through a very substantial pipeline of more than 100k homes under construction. Commercial building activity was also weaker, weighing on business investment. Conditions in the established housing market cooled further as the RBA's rate hiking cycle commenced. Housing price declines in the Sydney and Melbourne markets became sequentially larger as the quarter progressed, while price gains across the other capital cities slowed.
Export volumes rebounded from a weather-impacted Q1 as resource and rural goods exports picked up. The terms of trade likely reset to a new record high as elevated commodity prices supported another strong rise in export prices. Import volumes were boosted by the easing of restrictions on offshore travel and ongoing inventory rebuilding.
As it stands | National Accounts — GDP
The Australian economy expanded at a solid pace in the March quarter despite significant disruptions associated with the Omicron wave of Covid-19 and major flood disasters in New South Wales and Queensland. Real GDP increased by 0.8% quarter-on-quarter and by 3.3% through the year, taking output to 4.5% above pre-Covid levels.
Household consumption remained robust rising by 1.5% in the March quarter. The easing of restrictions on travel and at recreation and hospitality venues continued the rebalancing of spending patterns, rotating back to services categories (2.3%) from goods (0.3%). Accumulated savings and the strength of the labour market were supporting this spending despite inflationary pressures causing real incomes to fall for the second quarter in succession. The household saving ratio declined to 11.4% in Q1 but is still well above its long-run average.
Business investment gathered pace to advance by 1.4% in the quarter. This was driven by the non-mining sector (2.4%) as machinery and equipment spending rebounded from delays caused by supply chain constraints. The residential construction sector continued to be held back by materials and labour shortages; activity fell by 1%q/q following Q4's 1.9% contraction, hindering progress in working through the very elevated pipeline of new homes.
Assistance provided for the flood recovery response and further pandemic-related spending drove another strong rise in public demand, up 2.6%q/q to be 8% higher over the year. Net exports subtracted substantially from growth in Q1 (-1.7ppts); adverse weather conditions restricted exports (-0.9%) while imports picked up sharply (8.1%q/q) as constraints affecting the production of new vehicles and machinery and equipment eased. Rising imports also assisted in the rebuilding of inventories, contributing 1ppt to quarterly growth.
Key dynamics in Q2 | National Accounts — GDP
Household consumption — Strong labour market conditions and the high level of accumulated savings continued to underpin resilient household demand. Spending was rotating back to services categories from goods following the easing of restrictions on travel and at venues.
Dwelling investment — Residential construction activity fell sharply in the June quarter (-6.9%) as the sector continued to be hampered by materials and labour shortages. New home building plunged by 7.7% in the quarter and alteration work also declined (-1.9%).
Business investment — Private sector capex was soft in Q2 falling by 0.3%. A rise in equipment spending (2.1%) was offset by weakness in buildings and structures (-2.5%) as capacity constraints held back construction work.
Public demand — Public spending weakened in the quarter (-0.8%) after it was boosted by pandemic and flood-related assistance in Q1. This decline was offset by a rise in investment spending (3.4%).
Inventories — Are likely to take around 1ppt away from quarterly GDP after inventory rebuilding slowed in the quarter.
Net exports — Added 1ppt to activity in the quarter. Export volumes lifted by 5.5% as resources rebounded from weather-related disruptions and services benefitted from the reopening of the international border. Imports firmed slightly by 0.7%, supported by services (14.3%) as overseas travel started its recovery.
