The Australian economy expanded by 0.6% in the September quarter, a touch softer than the 0.7% increase expected by markets but broadly maintaining the momentum from the first half of the year (1.3%). Real GDP was up 5.9% from the delta lockdowns a year earlier, and 6.5% above its pre-pandemic level.
Household consumption (1.1%) continued to drive economic growth as spending remained supported by the post-pandemic rebound in services (1.7%), notably in travel (13.9%) and hotels, cafes and restaurants (5.5%). Goods consumption lifted only modestly (0.3%) but still remains more elevated relative to its pre-pandemic level (9.2%) than services (4%), suggesting the rotation in spending patterns has further to run.
There is an underlying resilience in demand, but it may be losing some strength. Growth in household consumption in Q3 was notably slower than in Q2 (2.1%). Disposable income growth was robust in nominal terms (1.6%), underpinned by income from the strong labour market; however, high inflation meant that real incomes were negative again in the quarter. Cost-of-living pressures were added to by surging interest payments as the RBA continued to raise rates aggressively.
The increase in consumption relied again on the savings accumulated over the pandemic. Households have been willing to spend out of accumulated savings given the strength in labour income. The household saving ratio has declined to 6.9%, in line with its level on the eve of the Covid crisis.
Modest and offsetting contributions came through in the remaining components. Residential construction (1%) and business investment (0.7%) expanded as capacity constraints holding back building work eased. The rebound in services spending is driving imports (3.9%), supported also by an improvement to the disruptions that have hampered global supply chains. On the back of this, inventory levels continue to rise adding to growth in Q3. Public demand was neutral for growth in the quarter, though it remains elevated at around 27% of real GDP, up from around 25% of GDP pre-pandemic.
In other key developments, the terms of trade pulled back from a record high level as prices of key commodity exports retraced. That still leaves the terms of trade 23.1% higher over the Covid period.
Because nominal GDP growth (0.8%q/q) was slower as a result of the decline in the terms of trade, inflation pressures measured by the GDP deflator declined to 0.2% in the quarter (6.9%Y/Y). However, the household consumption deflator lifted by 2%q/q, leaving the annual pace up at 6%, a softer outcome than the CPI (7.3%) but still indicative of the material cost-of-living increase households have faced.
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