Preview: GDP Q4

The Australian National Accounts for the December quarter are due to be published by the ABS this morning (11:30am AEDT). Real GDP growth is expected to have been subdued at around 0.2% in the quarter, reflecting similar outcomes in other advanced economies. The RBA's assessment of excess demand in the economy is set to face a key test. Much of the focus is on the household sector amid the various crosscurrents to consumption, but other components of demand that have been providing offsetting strength look to have softened in the quarter. 

A recap: Growth slowed further in Q3 as consumption stalled

The Australian economy slowed further in the September quarter as cost-of-living pressures and interest rate rises continued to weigh on household spending. Real GDP expanded by 0.2% in the quarter and 2.1% through the year, down sharply from a 5.8% pace a year earlier. Aside from real GDP slowing, the past year had also been characterised by weakness in per capita growth and productivity outcomes. 

Household consumption growth stalled in the most recent quarter, effectively flatlining over the past year (0.4%). The post-pandemic rebound in spending had largely run its course by late 2022, leaving consumption increasingly exposed to high inflation, rising interest rates and an increased tax burden. Reflecting this, discretionary-related consumption weakened over the past year (-0.8%) as the consumption of essential goods and services - what households have to purchase - increased (1.2%). Meanwhile, the household saving ratio declined to 1.1%, its lowest since Q4 2007. 

Higher interest rates and ongoing capacity pressures have driven weakness in residential construction activity (-0.3%Y/Y). By contrast, activity in the non-residential construction sector has risen at a solid pace, underpinning growth in business investment (8%Y/Y) and public demand (4.2%). Exports (6.8%Y/Y) have also supported growth, driven by the recovery in the tourism and education sectors. 

A preview: Headwinds to growth persisted into year-end

Outside of the US, growth in most advanced economies was modest in the final quarter of 2023, pointing to a similar outcome in Australia. Incoming data indicate that household consumption was subdued, while the resumption of the RBA's tightening cycle in November resulted in a decline in consumer sentiment readings. However, the dynamic around real household incomes improved as inflation declined sharply towards the end of the year.  

Leading indicators point to subdued growth in household consumption in Q4. The seasonal rise in spending in the lead-up to Christmas may have been less pronounced than in recent years. Discretionary spending was partly boosted by Black Friday sales, an event of increasing prominence amongst Australian households. 

A robust labour market continued to support household consumption. The earlier acceleration in wages growth followed by the subsequent fall in inflation saw real wages growth turning marginally positive in Q4. A slowing economy has, however, seen labour market conditions ease over the course of 2023. The unemployment rate averaged 3.8% over the back half of the year, rising from an average of 3.6% in the first half and up from the 3.4% cycle lows in late 2022. Hours worked declined by 0.7% in the December quarter, a sign of adjustment to softening demand conditions. 

Capital city housing price gains have slowed over recent months but still lifted by 9-10% on a nationwide basis in 2023. Strong population growth and ongoing constraints limiting the completion of new homes have contributed to rising housing prices, despite the effects of the RBA's hiking cycle. 

PropTrack chart

Summary of key dynamics in Q4

Household consumption — An improved dynamic around real incomes may have provided support to households. Retail sales volumes lifted by 0.3%, a modest rise but its strongest increase since mid-2022 nonetheless.

Dwelling investment — New home building and alterations activity weakened sharply in Q4. Higher interest rates and supply and labour constraints remain strong headwinds in the sector.

Business investment — Capital expenditure by private sector firms lifted modestly, led by buildings and structures investment. Equipment spending stabilised following a strong increase over the first half of the year. 

Public demand — Increased by 0.5% in Q4, moderating from stronger growth in prior quarters. Public spending (0.6%) was the main driver as momentum in investment (0.1%) slowed.  

Inventories — Expected to deduct 0.5ppt from quarterly growth. Mining inventory levels declined after shipments were disrupted in Q3, but this was moderated by an increase in public sector inventories. 

Net exports — Will add 0.6ppt to Q4 growth, a reversal of Q3's negative contribution. Export volumes were soft falling 0.3%, though imports saw a much larger 3.4% decline. 

Australian Capex 0.8% in Q4; 2023/24 investment plans $178bn

Australian private sector capital expenditure increased modestly by 0.8% in the December quarter. Capex has risen strongly through the past year or so; however, the momentum has started to fade. Forward-looking investment plans were upgraded in this survey and generally remain upbeat amid an outlook for slower growth. 

Private sector capex - a partial indicator of business investment that feeds through to the National Accounts - lifted by 0.8% in the December quarter, coming in above the consensus estimate (0.4%). The capex cycle has been in an upturn since mid 2022, but some of this momentum faded over the back half of 2023. 

Capex advanced by a sharp 6.8% in the first half of 2023 before easing to a 1.1% pace for the back half. This dynamic was evident in both major segments: buildings and structures 1.6% (2nd half) from 7.5% (1st half) and equipment 0.5% from 5.9%. The withdrawal of pandemic-related tax incentives at the end of the 22/23 financial year partly drove this slowdown, after capex - particularly on equipment - was frontloaded into the first half. Meanwhile, the profile around buildings and structures is consistent with the picture painted in yesterday's construction activity data for Q4.   

By sector, capex in the non-mining sector lifted by 0.6% in Q4, to be down by 1% for the second half of the year. But this was more than offset by a lift in mining sector capex, up by 1.1% quarter-on-quarter and 6.7% in the second half. This brought mining sector capex to its highest level since mid-2016. Non-mining capex sits near record highs.  

Today's report also included firms' updated estimates of spending plans. The 5th estimate for capex in 2023/24 was nominated at $177.7bn, a rise of 4% on the previous estimate put forward 3 months ago and up 12.2% on a year-to-year basis. Within this figure, non-mining investment plans were revised up by 4.3% to $125.4bn (+12.6% year-to-year) and mining sector plans were raised by 3.2% to $52.3bn (+11.3% year-to-year).  

Firms also put forward an initial estimate of capex plans for the 2024/25 financial year. This was put at a notional $145.6bn, the highest 1st estimate in 11 years and up 12.6% on estimate 1 for 2023/24. Non-mining plans were projected at $100.9bn (+15.1% year-to-year) and mining plans came in at $44.8bn (+7.3% year-to-year). 

Australian retail sales rise 1.1% in January

Australian retail sales increased by 1.1% in January, falling short of the 1.5% rebound expected after sales declined by 2.1% (revised from -2.7%) in December. Shifts in seasonal spending patterns have led to heightened volatility in the data, but the underlying momentum in retail sales looks soft.      

January's 1.1% rise in retail sales came after a 2.1% pullback in December, which had followed a strong 1.5% lift in November driven by Black Friday sales. As noted in today's release, the ABS's seasonal adjustment processes are struggling to account for shifts in seasonal spending patterns that are now occurring at this time of year, leading to this run of highly volatile outcomes. On a 3-month average basis, sales to January were 0.2%, consistent with subdued household demand as cost-of-living pressures continue to constrain spending. In level terms, January sales ($35.7bn) were in line with their level in September-October.   

At the category level, food spending was broadly flat (0.1%) in January following a 0.7% rise in December. Discretionary spending across all other categories rebounded by 1.8% from a 3.9% decline in the prior month. Within this, household goods (2.3%) and clothing and footwear (2.4%) saw similar increases, while department stores and other retailing were both up 1.7%. Cafes and restaurants (1.3%) posted their strongest outcome in 13 months, with the ABS attributing this to strong attendances at the various tennis events and BBL cricket across Australia in January.    

Australian construction work 0.7% in Q4

Australian construction work expanded by a further 0.7% in the December quarter (vs 0.8% expected), rising for the 6th quarter in succession. Construction activity is up by a sharp 8.7% through the year, with public sector infrastructure projects continuing to define this cycle. By contrast, residential construction remains weak as supply and labour constraints - legacy issues associated with the pandemic - and higher interest rates continue to impact. 

A 0.7% increase in construction work came through in the December quarter. The engineering component led the way posting a 2.7% quarter-on-quarter lift to be up by 15% through the year. Much of this strength has come in the public sector (6.1%q/q, 20.5%Y/Y), reflecting increased progress on major infrastructure projects that governments across Australia sought to roll out on an accelerated basis to support the economic recovery from the pandemic. This has, however, generated an associated boost for private sector engineering work (-0.1%q/q, 10.5%Y/Y). 

Building work was down 1.1% overall in the quarter, with growth through the year easing from 4.2% to 3.6%. Although non-residential work accelerated by 5% in the quarter (12.1%Y/Y) this was more than offset by a 5.2% fall from residential work (-1.9%Y/Y). In terms of non-residential work, industrial projects have been a beneficiary following low vacancy rates and rising rents.  

In the residential segment, private sector activity in new home building (-4.8%) and alterations (-7.8%) contracted sharply, leaving both components down through the year at -1.3% and -6.5% respectively. Despite a large pipeline of homes under construction, progress through to completion continues to be hindered while higher interest rates may have deferred some of this activity from coming through. The alterations space is normalising from the highs reached during the pandemic when this activity was supported by construction subsidies and low interest rates. 

Australian CPI 3.4% in January

Australia's headline inflation rate remained at 3.4% on a 12-month basis in January, in line with late 2021 lows and defying expectations for a rise to 3.5%. After peaking in late 2022 at 8.4%, inflation slowed sharply over 2023 and today's result holds onto this progress. The recent momentum in the CPI points to further declines in inflation over the first half of 2024, amid the backdrop of a slowing economy and an easing labour market. This will only encourage markets to keep RBA rate cuts priced into the profile for the back half of the year. 

January's report was broadly encouraging indicating that the disinflationary process has at least remained intact through the early part of 2024. There are, however, a couple of caveats hanging over this assessment: firstly, the January series updates only around 62% of prices, including only a small number of updates for services prices, the RBA's main area of focus, and secondly, the ABS has incorporated its annual reweightings into the January CPI. All this means the RBA will look for more data to be assured that inflation remains on track to come back to target. But there are already encouraging signs that this is likely to be the case, with headline inflation running within the upper half of the target band in both  3-month (2.7%) and 6-month (3.0%) annualised terms. 

The various measures of underlying inflation in the monthly series softened in January, but as above, the RBA will view this with caution, awaiting more details on services prices. In January, trimmed mean CPI was 3.8% (from 4%) and CPI ex-volatile items and holiday travel (seasonally adjusted) was 4% (from 4.2%). 

Turning to the categories, the main change in annual inflation came in household gas falling from 8.5% in December to -1.4% in January, driven by a large price rise (8.1% in January 2023) falling out of the annual calculation. Meanwhile, the effect of government rebates has held electricity prices to a 0.8%yr rise - the ABS reports the measures have kept what would have otherwise been a 15.3%yr rise at bay. Meanwhile, fuel prices eased from 5.3% to 3.1%yr on the back of a 0.9% month-on-month fall January. 

Pushing in the other direction, food inflation increased from 4% to 4.4%yr, but this is still well down from the highs of 9-10% in late 2022. There was a rise in the clothing and footwear category from -0.8% to 0.4%yr, likely associated with the end of Black Friday and Boxing Day sales.  

Macro (Re)view (23/2) | Equities flying high

Stellar results from tech giant Nvidia had by far the biggest impact on broad market sentiment this week. Various equity indices across the US, Europe and Japan went into the weekend sitting at record highs, unperturbed by what has been a notable climb in Treasury yields since the start of the year as Fed rate cut expectations have been wound back. This suggest that equities have been content to push higher on the basis that higher bond yields are reflecting an expectation for improving economic conditions.

There was little reaction to the minutes of the RBA's February meeting. The main themes in the minutes had largely already been communicated via the Statement on Monetary Policy and at various public appearances post the meeting. That said, more nuance was introduced to the reasoning behind the Board's decision to leave rates on hold. In December, the Board said that limited data releases allowed it to pause tightening and watch developments over its summer break. On this occasion, the Board concluded that maintaining the cash rate at 4.35% would "best balance" making progress towards its inflation and full employment objectives. This was on the basis that the data received through the early part of the year had given the Board "more confidence that inflation would return to target within a reasonable timeframe while allowing employment to continue to grow". In response, the Board softened its tightening bias, though it continues to highlight upside risks to the inflation outlook from services prices. 

Elevated services inflation is partly a function of rising labour costs. This made for a closely watched update of the Wage Price Index (WPI) for the December quarter. Wages growth lifted in line with expectations rising by 0.9% in the quarter, firming the annual pace from 4.1% to 4.2% (full review here). Annual wages growth is running near to a 15-year high but there were signs that the peak is nearing. Tightness in the labour market eased over the back half of 2023 and wages growth in the parts of the labour market that are most responsive to conditions appears to be reflecting this. Notably, private sector wages growth eased from 4.3% to 4.2% and the public sector - after lagging all the way through the cycle - accelerated from 3.5% to 4.3% as new enterprise agreements came into effect. 

In the US, the minutes of the FOMC's January meeting and various appearances from Fed officials during the week conveyed the message that there is no rush to cut rates. The minutes noted that "most participants" were alert to the risks associated with easing monetary policy prematurely; however, "a couple of participants" had pointed to the damage that could be done by maintaining restrictive settings for too long. The FOMC has been consistent in its messaging that it needs to gain "greater confidence" that the decline in inflation is durable and that it is on track to return to 2%. In holding this line, the market has had to come towards the Fed, with the number of rate cuts priced for 2024 declining from as many as 7 to the 3-4 currently anticipated.     

While Q4 GDP data was weak in both the UK and euro area, February's flash PMI readings painted a more constructive picture of growth in early 2024. The UK PMI strengthened from 52.9 in January to 53.3 in February, indicating an acceleration in activity. Optimism around the UK was also helped by comments from BoE Governor Bailey to the Treasury Committee that rates could start to be cut before inflation had been brought back to the 2% target. In the euro area, February's PMI improved to 48.9 from 47.9. While this remains in a contractionary range below 50, this reading suggests there had been an easing in the pace of decline in activity. Meanwhile, the ECB reported that negotiated wages slowed to a 4.5% year-on-year increase in Q4 from 4.7% in Q3. While this will offer the ECB some assurance that wage pressures are easing, the account of the January meeting noted that, assuming productivity growth of 0.5-1%, wages growth of around 3% would be consistent with its 2% inflation target.

Australian Q4 Wage Price Index 0.9%; 4.2%yr

Australia's Wage Price Index (WPI) increased by 0.9% in the final quarter of 2024, moderating from an acceleration in the previous quarter (1.3%). Annual wages growth firmed from 4.1% to 4.2%, its fastest since Q1 2009.  

The WPI - a measure of the growth in base wages in the Australian labour market - advanced by 0.9% in the December quarter, matching expectations. Base wages have increased by 4.2% over the past year, a near 15-year high pace reflecting strong labour market conditions, legislated increases to pay settings and elevated inflation. The main dynamic in the quarter was an acceleration in public sector wages, with the fastest quarterly rise (1.3%) coming through in 15 years. This accelerated annual growth from 3.5% to 4.2%, seeing the public sector - which has lagged all the way through the post-pandemic cycle - overtaking wages growth in the private sector. 

The ABS attributed the acceleration in public sector wages to the implementation of new state-based enterprise bargaining agreements (EBAs) in the health and education sectors. The contribution of EBAs to wages growth was higher than typically seen at this time of year; the ABS reports that 38% of public sector jobs saw a pay rise in Q4, up from 29% a year earlier, while the average pay rise received was 4.3% compared to 2.8% in Q4 2022. Meanwhile, after new awards came into effect and many annual reviews occured in Q3, the contributions from individual agreements and awards to wages growth lessened in Q4.

Coming off a spike in Q3 (1.5%), private sector wages growth retraced to 0.9% in Q4 - the same pace seen in the first two quarters of the year. Annual growth eased a touch from 4.3% to 4.2%. Almost 1 in 2 private sector jobs saw a pay movement in Q3, but just 16% of jobs recorded a change in Q4. The average pay rise received slowed sharply to 4.4% in the most recent quarter from 5.8% in Q3, though that needs to be taken with a degree of caution as a signal given the large seasonal decline in the number of jobs that saw a pay rise in Q4. 

From a broad industry viewpoint, wages growth in household services has continued to rise, nearly pressing 5% at an annual rate on my estimations; however, this is partly reflecting the boost from public sector EBAs in the health and education that won't be repeated. Wages growth across business services has effectively moved sideways over the past year.

Within individual industries in business services, wages growth has softened in some industries - likely reflecting eased labour market tightness - though it has yet to peak in other industries. 

Lastly, wages growth in the goods-related sector may also be topping out. Wages growth remains elevated across many of these industries - some of which are still known to be dealing with skills shortages - but the pace of rises is easing. 

Preview: Wage Price Index Q4

Australia's Wage Price Index (WPI) for the December quarter is due at 11:30am (AEDT) today. After accelerating in the previous quarter as increases to the minimum wage and awards came into effect, wages growth is expected to have moderated into year-end. Annual wages growth is likely around its peaks and the RBA forecasts it to slow from the middle of the year as labour market conditions ease.  

A recap: Wages growth accelerated sharply in Q3 

The WPI posted its fastest quarterly increase on record rising by 1.3% in Q3, lifting the annual pace from 3.6% to 4%, a high dating back to 2009. During Q3, wages growth accelerated as the increases to the minimum wage (8.6%) and award rates (5.75%) determined by the Fair Work Commission came into effect. This extended the rebound in wages growth from the lows reached during the pandemic, driven by very robust labour market conditions, adjustments to pay settings and high inflation. 

Sizeable contributions to wages growth in Q3 came from new enterprise bargaining agreements and awards. In addition, individual agreements also boosted wages growth but by a similar magnitude to the same period a year earlier. 

In the private sector, base wages lifted by 1.4% in the quarter to be up by 4.2% through the year. By contrast, wages growth in the public sector has lagged through the cycle rising by a more modest 0.9% in the quarter to 3.5% in annual terms. This reflects the effects of pay caps on public sector wages, policies that have been superseded over the past year or so.  

Wages growth to moderate in the December quarter

The wage-setting process in Australia conforms to a seasonal pattern where most jobs receive pay increases in Q3, following the completion of the previous financial year. This can be seen in the 'Methods of Pay Setting' chart above. Wages growth then typically eases in Q4. As a result of this, markets forecast wages growth to moderate to a 0.9% rise in the quarter (range: 0.8% to 1.1%), which would hold the annual pace at 4%.

In its recent Statement on Monetary Policy, the RBA forecast that wages growth is currently around its peaks for the cycle. Its outlook for the labour market is for conditions to ease such that the unemployment rate rises to around 4.5% over the next couple of years. This easing of the labour market is anticipated to result in wages growth slowing to the 3s by the end of the year, and this is backed by insights picked up in the Bank's Liason program. 

RBA chart

Macro (Re)view (16/2) | Easing expectations continue to shift on data

Signs of slowing disinflation in the US has markets sensing the Fed will be in no rush to remove restrictive monetary policy settings. Markets remain convinced easing cycles will occur in the US and other countries this year, but the timing and extent of rate cuts expected continues to swing around on the incoming data. Higher bond yields weighed on US equities whereas Japan's Nikkei continued to surge and Europe also advanced. 

Fed rate cut expectations continue to be wound back, with the catalyst this week being upside surprises in January's inflation data. Headline CPI (0.3%m/m) eased from 3.4% to 3.1%yr while the core rate (0.4%m/m) was unchanged at 3.9%yr, both coming in above consensus for 2.9% and 3.7% respectively. Slower disinflationary progress in January was reinforced by a stronger-than-expected lift in producer prices of 0.3%m/m. As a result, between 3-4 rate cuts are now priced for 2024, well down from the 7 cuts that were being discounted just a few weeks ago. This also brings market pricing closer to the Fed's signalling of 3 cuts for 2024. Inflation in January was driven by components such as services (0.7%m/m, 5%yr) and housing (0.6%m/m/6.1%yr), viewed by some as being indicative of the strength in the US labour market and domestic demand more generally. By contrast, goods inflation is very weak (-0.3%m/m/0.1%yr). 

The emphasis of policymakers at the ECB and BoE remains on inflation over growth. GDP growth in year-ended terms to Q4 was 0.1% in the euro area and -0.2% in the UK. Growth has been on a similar trajectory in both economies, slowing materially over the past year as the recovery from the pandemic has given way to binding pressures on consumption from high inflation and rising interest rates. In the UK, 12-month headline and core inflation held 4% (vs 4.1% exp) and 5.1% (vs 5.2%) respectively in January. Inflation is well down from its peaks (11.1% headline and 7.1% core), progress welcomed by BoE Governor Bailey at the House of Lords; however, this came with the caveat that services prices (6.5%yr) and earnings growth (6.2%yr) remained inconsistent with a return to 2% inflation. Similarly, the ECB President Lagarde told the EU Parliament that wages growth was expected to "become an increasingly important driver of inflation dynamics in the coming quarters".       

Seasonal volatility continues to cloud visibility over conditions in the Australian labour market. Employment failed to rebound from December's surprising decline (-62.7k) rising by just 0.5k in January, well below expectations for a 25k increase (full review here). With the participation rate steady (66.8%), the unemployment rate pushed up from 3.9% to 4.1%, a 2-year high. 

My interpretation is that the weakness in December and January is overstated and will reverse over the coming months - the ABS highlighted more than 200k will enter new jobs from February - but if this doesn't come to fruition, then the risk is that the RBA is behind the curve having left its tightening bias in place after assessing the labour market as being tight and an excess of demand in the economy. The survey data published this week only added to the uncertainty. Consumer sentiment (Westpac-MI index) picked up sharply by over 6% in February, but the NAB Business Survey for January reported ongoing weakness in confidence and a softening in trading conditions.