Growth in the Australian economy slowed to a 0.5% pace in the December quarter, a softer-than-expected outcome (0.8%) and below Q3's 0.7% expansion. Real GDP increased by 2.7% through the year, down from a 4.6% growth rate a year earlier.
In context, this was a resilient performance by the Australian economy given the scale of the slowdown in G7 economies over the past year and with pandemic restrictions weighing on the Chinese economy. On the domestic front, high levels of Covid-related absences posed major disruptions, while flooding on the east coast crunched farm GDP by almost 10% over the year.
Output in Australia expanded at a similar pace over the second half of 2022 (1.2%) to the first half (1.5%). But the composition of growth changed over the back half of the year, with domestic demand slowing to the point of stalling in Q4. Imports weakened in that context, which in turn led to net exports driving quarterly growth.
Household consumption increased only modestly (0.3%) as the post-pandemic rebound appeared to be largely complete. Household budgets were starting to be more noticeably affected by falling real incomes and rising interest rates. Private investment was weak as capacity constraints continued to hold back construction activity in the residential and non-residential sectors. Public spending has consolidated after the pandemic and recent floods.
Australian households came up against significant headwinds in 2022. The cost of living rose at its fastest pace since 1990, causing a historic decline in real incomes (-3.5%); pressures that were exacerbated by a rapid RBA rate hiking cycle and a correction in housing prices.
These pressures are set to intensify in 2023 — and with the pandemic rebound having effectively come to the end of the line — it will test the resilience of household consumption. Labour market conditions remain very strong, with the unemployment rate around its lowest level since the 1970s, while forward-looking indicators point to a continuation of robust labour demand.
Meanwhile, the stock of excess savings accumulated by households over the Covid period was substantial; well above $200bn on a conservative extrapolation of pre-pandemic trends in saving. Households now appear to be spending out of these excess savings.
The RBA returned in 2023 with a further rate hike to 3.35% and made a strong hawkish tilt following an upside surprise in underlying inflation in Q4. Since the February meeting, aggregate wages growth came in on the soft side of the RBA's expectations, while this GDP growth outcome was in line at 2.7% year-ended. The RBA likely retains its guidance for further rate hikes at next week's meeting, but there now looks to be a more plausible case that market pricing for a peak cash rate above 4% is too high.
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National Accounts — Q4 | Expenditure: GDP (E) 0.6%q/q, 2.6%Y/Y
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Household consumption (0.3%q/q, 5.4%Y/Y) — Household consumption growth slowed to a 0.3% rise in the quarter, its weakest outturn since the Covid lockdowns in 2021. The recovery from these lockdowns followed by the full reopening of the economy saw consumption increase by 5.4% through the year.
This rebound appears now to be largely complete, with consumption looking to have returned to its pre-pandemic trajectory.
In the quarter, consumption growth was driven by services (1.2%) as demand continued to rotate away from goods (-1.0%); this being the major theme in household spending over the past year as restrictions were eased and the pandemic subsided.
Pent-up demand in areas such as travel services (5.7%) and at hotels, licensed venues and cafes (1.6%) continued to come through in Q4; however, their impulse to consumption growth has faded.
More broadly, discretionary-related consumption has cooled, easing to growth of 0.4% from 1.9% in Q3, which incorporated weakness in clothing and footwear (-2.7%), recreation and culture (-1.4%) and household furnishings (-1.2%).
Although the strong labour market remains a key support for household budgets, disposable income contracted in Q4 (-0.7%) due to surging interest payments (22.4%) and higher income tax (7.9%).
This squeeze was amplified by the cost of living (the household consumption deflator was 1.5% in Q4), leaving real incomes down by a sharp 2.2% for the quarter and 3.5% lower over the year, declines of historic magnitude.
This caused households to save less from of their disposable income, reflected in the decline in the saving ratio from 7.1% to 4.5%, its lowest in more than 5 years. In nominal terms, this equated to a $9.1bn reduction in saving over the quarter. The stock of excess savings households accumulated over the Covid period was substantial, likely in the order of $200-250bn. Households now appear to be drawing down these savings to support spending.
Dwelling investment (-0.9%q/q, -3.7%Y/Y) — Residential construction activity weakened in Q4 (-0.9%) to be down by 3.7% through the year. Capacity constraints and Covid- and weather-related disruptions have held back the sector from working through a substantial residential pipeline.
These headwinds eased over the back half of the year, allowing new home building to rebound by 4.8% over the period (1.4% in Q4) after contracting by 4.4% in the first half. Alterations (-2.4%) continued to decline and are unwinding from a very elevated level as more of the renovations commenced under the Federal Government's HomeBuilder grants scheme are completed.
Ownership transfer costs — fees associated with real estate transactions — declined by a further 6.2% in the quarter and are now almost 21% down on a year ago. This has come alongside the correction in the housing market — housing prices nationally are down by around 9% from the Covid peak — coinciding with the RBA's rate hiking cycle.
Business investment (-0.8%q/q, 3.1%Y/Y) — Four consecutive quarters of rising business investment ended with a 0.8% decline in Q4. Business investment expanded by 3.1% over the year, broadly in line with the increase in domestic demand (3.3%), and is now more than 8% above the subdued levels seen in the years prior to the pandemic.
A 2.2% decline in non-residential construction activity was the main source of weakness in Q4. However, this was after a 5.8% surge in Q3. The net result left non-residential construction up by 3.5% in the second half. This was a rebound from a contraction in the first half of the year (-1%), indicative of eased capacity constraints and fewer weather-related disruptions as 2022 progressed. In contrast, equipment investment was strong in the first half (7.6%) but then weakened in the back half of the year (2.7%).
Public demand (0.2%q/q, 2.5%Y/Y) — Public demand increased very sharply over the pandemic, with flooding disasters in 2022 keeping it at elevated levels. Consumption spending drove the increase advancing by 0.6% in the quarter. Underlying investment declined (-2.1%) but has been in an upswing phase coming out of the pandemic as governments have brought forward infrastructure projects.
Inventories (-0.5ppt in Q4, -0.1ppt yr) — Inventories were coming off a surge in Q3 as global supply chain constraints improved. In Q4, non-farm inventories weighed on activity. This was driven by a decline in retail inventories due to softer demand, while an improvement in supply chains supported a clearing of mining inventories. Public authorities and farm inventories increased.
Net exports (1.1ppts in Q4, -0.4ppt yr) — Net exports made the largest contribution to quarterly growth adding a substantial 1.1ppts. Exports advanced (1.1%) supported by an easing of constraints in the resources sector (2.5%) and by the rebound in overseas arrivals driving services (9.8%). However, exports remain in recovery mode, with volumes still 5.9% down pre-pandemic levels.
Imports weakened in Q4 (-4.3%) painting a picture of softening demand with broad-based falls across goods (-3.8%) and services (-6.5%). But this comes after a very strong rebound, with imports up 3% on pre-pandemic levels, even after the Q4 decline.
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National Accounts — Q4 | Incomes: GDP (I) 0.5%q/q, 2.6%Y/Y
The real income GDP estimate in the December quarter was 0.5% and 2.6% over the year. National income picked up from a 1.2% lift in Q3 to advance by 2.1% in Q4, with year-ended growth remaining elevated (12%). Nominal GDP has increased by an extraordinary 25.6% over the Covid period, reflecting the combination of the strong economic recovery, the surge in global commodity prices and rising inflation.
The nation's terms of trade lifted modestly (0.5%q/q), with the level around 5% below the record high reached in the June quarter. Elevated commodity prices continue to bolster national income.
Conditions in the Australian labour market are the strongest they have been in many decades. Compensation of Employees remained robust rising by 2.1% in the quarter — albeit well down from Q3 (3.2%) — to be up by more than 10% through the year. This rise reflected increased employment and hours worked (up 2% in Q4), as well as upward pressure on wages stemming from labour shortages.
Growth in hourly labour costs has been volatile over the Covid period, affected by compositional shifts. However, the pace may be starting to settle. At 2.9% in year-ended terms, hourly nonfarm labour costs are running at a moderate pace, below the pace of base wages growth in the economy (3.4%).
Private non-financial company profits rebounded from a decline in Q3 to rise by 3.7%, leaving profits up by 21.1% through the year. The main drivers of the rebound were mining on the back of increased production and higher commodity prices, and the retail industry as price rises and an easing of cost pressures improved margins.
Financial corporations company profits slowed to a 0.5% rise in Q4 but were up solidly (8.4%) over the year. A 1.5% decline in gross mixed income partly reflected weakness in the farming sector, which was heavily affected by the east coast floods.
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National Accounts — Q4 | Production: GDP (P) 0.4%q/q, 2.7%Y/Y
The production estimate of GDP (0.4%) was the weakest of the three estimates. Year-ended growth (2.7%) was in line with the headline result. Gross Value Added (GVA) was slightly stronger in the services-related sector of the economy (0.4%) than in the goods-related sector (0.2%), but both sectors slowed from the prior quarter. Outside of these sectors, the agriculture industry fell heavily for the second quarter running (-2.6%), impacted by flooding along the east coast.
The goods-related sector was propped up goods production (0.4%) as mining advanced (3.2%) on the back of an expansion in iron ore output. This was enough to offset declines in manufacturing (-1.8%) and construction (-0.3%) associated with adverse weather.
Goods distribution (-0.2%) softened on weaker demand impacting the wholesale (-0.7%) and retail industries (-0.4%). Those falls were attenuated by the transport industry (0.6%) as the post-pandemic recovery in international travel and public transport continued.
GVA by the services-related sector was driven by household services (0.7%). This was supported by the Covid rebound in domestic travel, which boosted demand for accommodation and dining out (1.4%). Meanwhile, personal services advanced (4.9%) and arts and recreation services (2.4%) lifted into year-end on increased sports and gambling activity.
Business services were broadly flat in Q4 (0.1%). Gains were posted by administration (2.4%) and the telecommunications (2.6%) and real estate industries (1.1%). However, that was largely offset by professional services (-1.8%) as demand for consultancy services softened, while lower loan demand saw finance and insurance (-0.2%) weaken.
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National Accounts — Q4 | Prices
Inflation pressures remained elevated in the December quarter. Domestic prices (excluding traded goods and services) lifted to a new 32-year rising by 6.6% over the year. There was a moderation in the quarterly rate to 1.4% from 2% in Q3, which reflected an easing of goods-related price pressures as supply chain constraints eased.
Traded goods and services prices continue to rise, with import prices up 1.3% in the quarter. Services-related inflation continued to rise on the back of higher labour costs linked to the strong labour market conditions.
The household consumption deflator (CPI equivalent in the national accounts) moderated in Q4 to a 1.5% increase from the high in Q3 (2.1%). However, the year-end pace was up at 6.9% from 6.1%. These latest increases were below the CPI (1.9%q/q and 7.8%Y/Y). Whereas the CPI basket is fixed, the household consumption deflator moves with actual spending from one quarter to the next. Rising cost-of-living pressures are seeing household preferences move towards cheaper goods and services.
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National Accounts — Q4 | States
State demand was characterised by weak growth across the nation, with a slowdown in household consumption being the key dynamic. In New South Wales, state demand contracted in the quarter (-0.1%). Household consumption slowed from 0.8% to 0.2% on a quarterly basis. Meanwhile, declines came through in residential construction activity (-1.2%) and business investment (-1.1%).
Victoria posted quarterly growth of 0.2%, an increase from a flat Q3. The slowdown in household consumption was sizable (1.4% to 0.4%) and residential construction fell (-1.4%). The key offsets were business investment (0.9%) and public demand (0.3%).
Queensland (-0.3%) and South Australia (0.2%) posted declines as both states saw household consumption contract by 0.1% in the quarter. Household consumption was coming off solid growth in both states in Q3 (0.7% in Qld and 1.5% in SA). A similar theme was evident in Tasmania, which together with weakness in residential construction led to state demand stalling in Q4.
Western Australia went against the broader trend as household consumption lifted to growth of 1.6% from 0.2% in Q3; the increase supported by reopening factors in tourism and hospitality. However, state demand was little more than flat (0.1%) due mostly to government measures to ease cost-of-living pressures unwinding.
