The slowdown in the Australian economy continued in the September quarter. Real GDP was 0.2% quarter-on-quarter - the weakest outturn in a year - coming in below expectations (0.5%) after growth expanded by 1% through the first half of the year. Pressures on household finances are weighing heavily on consumption, driving the slowdown. Growth firmed from 2% to 2.1% through the year, down sharply from a 5.8% pace 12 months ago. Rapid post-pandemic population increase (2.4%) continues to imply weakness in per capita GDP (-0.3%Y/Y).
The Australian experience is consistent with the slowdown in advanced economies offshore, with growth across the OECD averaging 1.7% through the year to Q3. US growth has been a notable exception, accelerating in the most recent quarter (1.3%) to 3%Y/Y. In China, growth has been patchy from quarter to quarter as it has continued to come out of the pandemic.
Domestic household consumption has slowed sharply over the past year, stalling in the September quarter (0%). Elevated inflation has caused a historic decline in real disposable incomes. At the same time, disposable income has been squeezed by the RBA's tightening cycle, while the strong labour market and rising wages have led to a rising tax burden. Combined, mortgage interest costs and income tax are taking up a very high (and still rising) share of gross income.
Consumption growth, though weak, is still positive but would almost certainly be declining without households having the sizeable stock of savings accumulated during the pandemic to spend from. The extent and duration of the savings draw-down remains to be seen, a key variable to the economic outlook. However, if Australian inflation follows global trends and decelerates at pace in 2024, an improved dynamic around real incomes could support consumption by more than many expect.
Driven by the slowdown in household consumption, private demand has continued to weaken (0.2%q/q, 1.4%Y/Y). This also reflects an easing of momentum in investment in the quarter after tax incentives for new equipment purchases expired. Meanwhile, residential construction activity remains weak. An expansion in public demand (1.4%q/q, 4.2%Y/Y) has bolstered the Australian economy, holding an even sharper slowdown at bay.
Overall, the September quarter National Accounts confirm that demand conditions in Australia have cooled materially. Indications are that this will continue, which should help to ease domestic inflation through 2024. The cash rate (4.35%) looks unlikely to rise any higher, despite the RBA leaving its tightening bias in place at its final meeting for the year.
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National Accounts — Q3 | Expenditure: GDP (E) 0.2%q/q, 2.1%Y/Y
Household consumption (0%q/q, 0.4%Y/Y) — Pressures on household budgets from the cost of living, rising interest rates and taxes have intensified, causing household consumption to slow to the point of stalling in Q3 (0%). Growth came close to flatlining through the year (0.4%) and is down substantially from its pace 12 months ago (11.8%).
In nominal terms, household incomes are rising sharply (1.8%q/q, 7.5%Y/Y), supported by the strongest labour market conditions in decades and recent increases to award rates. But this is being offset by elevated inflation, higher interest rates and rising taxes. Reflecting all this, disposable income growth is weak (0.1%q/q, 1%Y/Y) - deeply negative in real terms (-1.3%q/q, -4.6%Y/Y) - and the household saving ratio fell to its lowest level since 2007 at 1.1% in Q3.
Although the RBA held rates steady through Q3, interest costs continued to rise (7.6%) as more fixed-rate periods on mortgages rolled onto higher variable rates. Meanwhile, income taxes surged (7.6%q/q) due to rising wages pushing people into higher tax brackets and with the Low and Middle Income Tax Offset ending.
Despite these headwinds, discretionary-related consumption (0.7%) saw its first quarterly rise in a year, as the essential category contracted (-0.5%). That profile suggests households were spending out of the stock of savings built up during the pandemic, estimated widely to be in the order of $250bn. The rebound in discretionary consumption included a 13% surge in new vehicle purchases, a 3.9% lift in transport services (associated with overseas travel) and a 0.9% increase in hospitality services, boosted by the FIFA Women's World Cup. The weakness in essentials appears overstated given that it reflects the effect of government rebates reducing household spending on utilities and child care.
Dwelling investment (0.2%q/q, -0.3%Y/Y) — Residential construction activity remains weak rising by just 0.2%q/q, with higher interest rates and capacity pressures weighing over the past year (-0.3%). New home building saw a modest fall (-0.3%), declining for the first time in 5 quarters. Alteration work has been unwinding from the surge this activity saw during the pandemic; however, it posted its first increase in 2 years with a 1% rise coming through in Q3.
Business investment (0.6%q/q, 8%Y/Y) — Business investment has been resilient to the broader economic slowdown. Growth was particularly strong through the first half of 2023 (6.8%) but the momentum slowed in Q3 (0.6%). This came after machinery and equipment investment was frontloaded into the first half (9.1%) ahead of the expiry of pandemic-related tax incentives at the end of the 2022/23 financial year. This subsequently saw equipment investment consolidating in Q3 (0.2%). Non-dwelling construction - also strong in the first half (5.4%) - eased (0.6%) as building activity fell (-1.5%); however, a surge in mining sector investment (9.6%) supported engineering work (2.3%).
Public demand (1.4%q/q, 4.2%Y/Y) — A major driver of growth in Q3, contributing 0.3ppt to real GDP. Strength in public demand over the past year (4.2%) has bolstered the economy from the slowdown in private demand (1.4%) as the pandemic recovery has cycled and cost-of-living pressures and higher rates have taken effect. Governments have attempted to moderate these headwinds through measures such as rebates on energy bills, child care payments and assistance for pharmaceuticals and aged care, underpinning a lift in public expenditure to 1.1%q/q (2.9%Y/Y). Meanwhile, progress in rolling out the large pipeline of public transport, energy and communication projects continued at pace in Q3 (2.8%q/q, 11.6%Y/Y).
Inventories (0.4ppt in Q3, -1.1ppts yr) — A large rise in mining sector inventories - the outcome of exports falling by more than the decline in production - underpinned the headline 0.4ppt contribution to real GDP in Q3. Wholesaler inventories increased as the easing of global supply pressures facilitated the delivery of new vehicles.
Net exports (-0.6ppt in Q3, 1.4ppts yr) — Subtracted 0.6ppt from quarterly activity, largely reversing its 0.8ppt contribution to growth in the previous quarter. Export volumes declined by 0.7%, backsliding to be 3.2% below pre-Covid levels at the end of 2019. Weakness in resources exports (-4.7%) were the main driver. There was some offset from the services sector (1.9%), supported by inbound travel for the FIFA Women's World Cup and by overseas students. Imports advanced by 2.1%, rising to be nearly 10% above pre-Covid levels. Services imports surged in Q3 (8.4%) on the back of strong demand for overseas travel.
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National Accounts — Q3 | Incomes: GDP (I) 0.2%q/q, 2.0%Y/Y
Australian national income was weighed by another decline in the terms of trade (-2.6%), its fourth decline from the past five quarters to be 14.1% below its record high in mid-2022. Export prices contracted by 1.4%, reflecting falls in major commodity prices amid slower global growth and elevated inventories, while import prices lifted by 1.2%.
Although the terms of trade fell, nominal GDP growth was 1.2% in the quarter (4.5%Y/Y), rebounding from a fall in Q2 (-0.7%). This outcome came on the back of a 1% rise in economy-wide prices together with the 0.2% lift in output.
Wage incomes rose at an accelerated pace in Q3 (2.6%), its fastest rise in a year, to be up by 8.4% through the year. This quarterly rise was supported by the continued strength in the labour market, the Fair Work Commission's increases to award rates and the lifting of public sector wage caps.
Due to hours worked in the economy contracting in Q3 (-0.6%), non-farm wages rose by an even sharper 3.1%q/q to 4.1% in year-ended terms. However, an increase in quarterly productivity of 0.8%q/q (as output rose and hours worked declined) meant that some of that uplift in wages was offset. Unit labour costs for firms - labour costs adjusted for productivity - lifted by 2.2% in Q3, with the year-ended pace easing from 6.9% to 6.4%.
After falling by 7.6% in the previous quarter, company profits in the non-financial sector declined by a further 4.5% in Q3 to be down by 6% through the year. Weakness in commodity prices weighed on mining profits, while margin pressures crimped profits in professional services and in transport services. By contrast, financial company profits are advancing (2.1%q/q, 6.4%Y/Y) with net interest margins expanding due to higher interest rates. Small business and farming profits (gross mixed income) were broadly flat in Q3 (0.3%) but down 4% year-on-year.
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National Accounts — Q3 | Production: GDP (P) 0.2%q/q, 2.1%Y/Y
The September quarter GDP production estimate was 0.2%, matching the headline growth outcome. Year-ended growth firmed modestly from 1.8% to 1.9%. Gross Value Added (GVA) in the services sectors advanced, led by household services (1.2%) from business services (0.4%). The goods sectors were broadly offsetting: goods production contracting (-0.5%) but goods distribution expanding (0.5%).
Household services saw broad-based gains in output across the various industries. The FIFA Women's World Cup supported the hospitality (1.5%) and arts and recreation (2%) industries. Public health services underpinned the health care industry (1.8%). Business services moderated from Q2 (0.9%), driven by a pullback in labour hire and recruitment that weighed on administration and support (-1.7%). Media services drove the telecommunications industry (2.6%). Professional services picked up on the back of increased demand for engineering services.
Goods distribution (0.5%) was driven by a pick-up in demand in the retail industry (0.6%) for household goods and clothing and as supply chain pressures for new vehicles eased. The transport industry remained robust supported by overseas travel demand. Goods production contracted (-0.5%), with utilities falling (-2.6%) as unseasonably warm weather reduced household demand for energy. Mining production also declined (-1%) amid outages for maintenance.