Household spending continued to drive growth in the Australian economy despite falling real incomes and surging interest payments. Real GDP expanded by 0.6% in the September quarter, slightly softer than expected (0.7%) but the momentum in growth from the first half of the year (1.3%) was broadly maintained. Output is now 6.5% higher than its pre-pandemic level at the end of 2019, with growth rebounding by very a strong 5.9% from the Delta wave lockdowns a year earlier.
In the September quarter, household consumption contributed the bulk of the increase in activity (0.6ppt) as services spending (0.5ppt) continued to rebound from the pandemic. The recovery in overseas travel was boosting imports, leading to a negative contribution from net exports to GDP (-0.2ppt). Rising imports also reflected an easing of pressure in global supply chains; the production of vehicles has picked up supporting a rise in inventories (0.2ppt). Fewer disruptions caused by wet weather and an improvement in capacity constraints for materials and labour saw home building activity (0.1ppt) and non-residential construction (0.2ppt) adding to quarterly growth.
Headwinds from the global economy intensified in the quarter. Growth in advanced economies moderated as cost-of-living pressures squeezed real incomes and slowed household spending. US household demand was proving to be more resilient than in the euro area and the UK. Global supply chain constraints had shown further signs of easing but were likely to still be holding back activity. Some of that improvement followed the easing of Covid lockdowns in China, supporting a rebound in quarterly growth there.
Global inflation pressures remained elevated. Headline inflation appeared to be around its peak as energy prices retraced from the highs reached following the Russian invasion of Ukraine. However, high underlying inflation was persisting and monetary policy continued to be tightened aggressively in response, most notably in the US.
Supply pressures in global energy and goods markets have contributed to rising inflation in Australia. Domestic inflation pressures have also risen in response to strong demand and supply disruptions caused by floods down the east coast during an extended La Niña system. The domestic demand deflator rose above 6% in year-ended terms, its fastest pace since 1990.
Adding to the cost-of-living pressures were rising interest rates in Australia. The RBA raised rates by 150bps over the September quarter, and although their full effect had yet to be felt, interest payments on mortgages had risen to their highest in 10 years.
Households have continued to increase their spending as the effects of the pandemic have dissipated, particularly in the services sector in areas including travel, events and dining out. That spending has been supported by a very strong labour market where the unemployment rate has declined to a half-century low of 3.4% and broader measures of spare capacity are at multi-decade lows.
Robust demand and rising prices has meant that households have increasingly been spending more of their disposable income. The household saving ratio has declined back to its levels on the eve of the pandemic. However, based on an extrapolation of pre-pandemic trends, the household sector on aggregate is estimated to have built up well over $200bn in excess savings over the Covid period, which might now be drawn down and keep the momentum in spending rolling for a time.
The RBA has continued to raise rates, announcing 25bps increases at the last two meetings. At 3.1%, the main policy rate has risen by 300bps since May. Slower domestic growth is projected by the RBA to 1.5% in 2023 and 2024 as the rebound in household spending from the pandemic runs its course and in response to tighter monetary policy. The risks look to be to the downside given the falls in real income reported in the Q3 national accounts, though the large amount of accumulated savings could offset that headwind to some degree depending on the willingness of households to draw down those funds. The Board's guidance indicates rates are likely to rise in 2023 when it next meets in February. The rapid rise in rates gives rise to the risk of overtightening, with the Board noting it is aiming to keep the economy "on an even keel" as it returns inflation to target "over time". A 25bps hike could be on table in February ahead of a pause in the tightening cycle in March.
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National Accounts — Q3 | Expenditure: GDP (E) 0.6%q/q, 5.8%Y/Y
Household consumption (1.1%q/q, 11.8%Y/Y) — Real household consumption growth was solid in Q3 at 1.1% but the pace moderated from Q2 (2.1%). Consumption has risen by 11.8% through the year, with more than three-quarters of that growth coming through in services as spending patterns were rebalancing after the lockdowns and the reopening of the borders.
Services consumption advanced by 1.7% to be 4% higher than its pre-pandemic level, with hotels, cafes and restaurants (5.5%) and travel services (13.9%) driving growth in Q3. A modest rise in goods consumption was posted in Q3 of 0.3% to remain at very elevated levels, up 8.9% on a pre-Covid comparison. Vehicle purchases increased sharply (10.1%) as disruptions hampering global production eased allowing backlogged orders to be delivered. Household furnishings and equipment (-1.5%) declined for the second quarter running, which is likely to be linked to the cooling property market on a weaker volume of transactions.
The rebound in household consumption over the past year has come alongside the largest hit to real disposable incomes (-2.7%Y/Y) since the early 1990s as inflation pressures have surged coming out of the pandemic. While this has weighed heavily on household sentiment, consumption has remained resilient.
Key factors behind this resilience have been pent-up demand, the very strong labour market and accumulated savings. In nominal terms, disposable income lifted strongly in Q3 by 1.6% (up 3.3% over the year) as labour income (3%q/q, 9.5%Y/Y) has been supported by the decline in the national unemployment rate to 50-year lows. Increases to the national minimum wage and the superannuation guarantee added a further boost in the quarter. The strength in labour income was more than sufficient to offset an acceleration in interest payments as the RBA continued to raise rates aggressively.
The effects of rising cost-of-living pressures and RBA rate hikes show in the decline in the household saving ratio from 12.9% at the start of the year to 6.9% in Q3, now broadly back in line with pre-pandemic levels. Over the period, in nominal terms, household consumption has lifted by 10.5% reflecting the combination of underlying demand and high inflation. This far exceeds the lift in disposable income (3.7%) leading to the reduction in saving.
Dwelling investment (1.0%q/q, -3.9%Y/Y) — Residential construction activity posted its first quarterly rise (1.0%) in a year as supply constraints in materials and labour and wet weather delays eased from recent quarters.
Pandemic stimulus measures including construction subsidies and RBA rate cuts led to a substantial pipeline of new homes, but the supply and weather-related disruptions have hampered activity in the sector significantly over the past year (-3.9%). Despite a sharp rebound in new home building in Q3 (3.4%) activity in the segment is still down 2.8% through the year. Alteration work is unwinding (-2.2%q/q, -5.3%Y/Y) as more of the renovations started in response to the HomeBuilder scheme are being completed.
Conditions in housing markets across the nation are cooling in response to the RBA's tightening cycle. Housing prices are down by around 7% on a national basis from their recent peak in April according to CoreLogic. A reduction in transaction volumes continues to weigh on ownership transfer costs — fees associated with real estate transactions — down 11.2% in Q3 to be 16.2% lower through the year.
Business investment (0.7%q/q, 3.7%Y/Y) — The expansion in business investment extended to a fourth quarter in succession, rising to 8.1% above its pre-pandemic level. The strength in domestic demand, accommodative financing conditions and tax incentives have been key to this expansion.
In Q3, non-residential construction (4.3%) was the main driver as both building (3.8%) and engineering activity (4.8%) picked up pace as supply and weather-related disruptions eased. This more than offset a pullback in equipment investment (-3%) from an elevated level, up 14.4% over the Covid period since the end of 2019.
In the recent ABS capital expenditure survey, forward-looking investment plans for 2022/23 were upgraded and remain upbeat despite official forecasts anticipating a slowdown in global and domestic growth over the next couple of years.
Public demand (0.2%q/q, 3.2%Y/Y) — Growth in public demand has consolidated over the past couple of quarters, slowing year-ended growth to 3.2% from its peak of 8.2% in Q1. Government expenditure was driven to a very high level in response to the pandemic and recent flooding events along the east coast but was broadly flat in Q3 (0.1%). Underlying investment slowed to growth of 0.5% in Q3, contributing only modestly to year-ended growth despite an expansive pipeline of public infrastructure projects.
Inventories (0.2ppt in Q3, 1.1ppts yr) — Pressures in global supply chains caused by product shortages and lengthy delivery times have improved, driving a rebuilding of inventories that has added 1.1ppts to GDP growth over the past year. In Q3, better weather conditions allowed production in the mining sector to rebound. Meanwhile, retail inventories increased sharply reflecting the improvements to supply chains that have hampered vehicle production.
Net exports (-0.2ppt in Q3, -1.9ppts yr) — Net exports weighed modestly on quarterly GDP. Imports increased by 3.9% driven by services (16.2%) as the recovery in offshore travel continued, rising overall to 7.9% above their pre-pandemic level. Goods imports advanced by 1.5% and by 11.1% over the year as constraints in global supply chains affecting vehicles (22.5%) and capital goods (9%) production have eased. Export volumes expanded by 2.7% but were still 6.5% below their pre-pandemic level. Services exports surged (10.6%) as the recovery in inbound travel gained momentum following the full reopening of the international border earlier in the year. Resources exports softened (-0.4%) driving a moderation in goods export volumes to 1.4% in Q3 from the previous quarter (4%).
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National Accounts — Q3 | Incomes: GDP (I) 0.6%q/q, 5.9%Y/Y
The real GDP income estimate printed at 0.6% in the September quarter, elevating growth through the year from 2.9% to 5.9%. In the quarter, the new development was commodity prices retracing from the elevated levels they hit in response to the war in Ukraine, weighed by concerns around the global economic outlook. This led to export prices falling by 2.8%q/q while import prices advanced 4.1% reflecting the high global inflationary environment. That set of outcomes saw the terms of trade pulling back from its record high, posting a 6.7% decline in the quarter, its largest quarterly contraction in more than a decade. Even with that decline though, the terms of trade are still 23.1% higher than their pre-pandemic level.
The falls in commodity prices flowed through to weigh on private non-financial corporations gross operating surplus (-4.7%) driven by a fall in mining profits. Profits in the manufacturing industry were hit by margin pressures stemming from rising energy prices. Worsening margins are also likely to have been a factor in the 1.7% decline in gross mixed income (small business profits). Attenuating those falls, financial corporations gross operating surplus lifted by 4.9%, its strongest quarterly rise in 14 years boosted by rising interest rates.
Although quarterly growth in hours worked was modest (0.1%) and employment growth consolidated, compensation of employees increased strongly by 3.2% (and 10% in year-ended terms) reflecting the tightening in the labour market as the economy has come through the pandemic. The quarterly increase was boosted by the national minimum wage rise and the lift in the superannuation guarantee. Measures of labour costs on an hourly basis softened to around 3% year-on-year, a similar pace to aggregate wages growth.
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National Accounts — Q3 | Production: GDP (P) 0.7%q/q, 5.9%Y/Y
The GDP production estimate was 0.7% in the quarter as year-ended growth lifted from 3.3% to 5.9%. Industries in goods distribution led the way in the September quarter, with gross value added (GVA) on aggregate rising by 1.9% to be 6.3% above its pre-pandemic level. The main driver was the transport industry (3.5%) reflecting the ongoing rebound in overseas travel. Meanwhile, the wholesale industry also advanced (1.3%) as vehicle imports improved following earlier supply-related impacts.
GVA in goods production saw its strongest increase in 2022 (0.9%) to move firmly into its post-pandemic expansion phase. Fewer weather-related disruptions and an easing in capacity constraints saw the construction industry rise by 2.3%. The mining industry posted a 1.2% increase as iron ore production rebounded due to improved weather conditions.
Business services industries contributed a 1.1% increase in GVA in the quarter to be 11% above its pre-pandemic level. The strong labour market and robust domestic demand conditions supported broad-based growth in administration (3.3%), professional and IT services (1.1%). However, the rental, hiring and real estate industry weakened (-0.6%) as activity in the housing market declined.
Reopening dynamics supported a modest rise in household services GVA (0.3%), lifting to an 8.1% expansion on a pre-pandemic comparison. Accommodation and food services were the driving factor, accelerating by 3.4% on the back of the strength in demand for dining out and domestic tourism. There was a moderation in arts and recreation services (-0.2%) following a strong rebound (5.7% above end 2019 levels) as demand for gambling activities and performances consolidated.
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National Accounts — Q3 | Prices
Domestic inflation pressures lifted in the September quarter. Robust demand conditions and rising input costs saw the domestic demand deflator rising by 1.8%, its strongest quarterly rise since the introduction of the GST in 2000 to be running at a 6.2%Y/Y pace. Consumer prices measured by the household consumption deflator rose by 2%q/q and by 6.0% over the year. That is a softer pace than the CPI (7.3%Y/Y) reflecting substitution in the consumption basket of households to cheaper alternatives. Growth in nominal GDP slowed to a 0.8% rise for Q3 (its weakest outcome in a year) as the terms of trade declined (-6.7%). That was the key factor in the economy-wide GDP deflator slowing to just a 0.2%q/q rise, with year-ended growth moderating to 6.9%.
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National Accounts — Q3 | States
A wide variation in state demand outcomes was reported in Q3. Tasmania came in on the topside at 1.6%q/q (its strongest rise in a year) while South Australia (0.1%) and Victoria (0.0%) were in at the low end. South Australia was consolidating as state demand rose to 11.7% above its pre-pandemic level.
Demand in Victoria slowed as a 1.3% rise in household consumption was offset by falls in residential construction (-1.1%), business investment (-1.6%) and public demand (-0.8%). In New South Wales, state demand was up 0.7% and looks to have recovered to its pre-Delta wave trajectory when lockdowns hit the state hard, with demand now 4.9% above its pre-pandemic level. Consumption growth slowed in Q3 but was still solid (0.9%).
State demand rose at a similar pace in Q3 in Queensland (0.7%) and Western Australia (0.6%). Both states have seen a similar post-pandemic expansion in demand, up 12.2% in Western Australia and 10.6% in Queensland. This has been driven by household consumption as restrictions affecting both states' large tourism sectors have eased.
