Australia's National Accounts for the March quarter are due to be published by the ABS at 11:30am (AEST) today (5 June). Economic headwinds intensified as 2023 progressed, leading to a continuation of subdued growth in early 2024. Expectations are for GDP growth of around 0.2% in the March quarter. The key dynamic remains around the consumer, under pressure from the higher cost of living and the transmission of the RBA's tightening cycle.
A recap: Growth slowdown extended into year-end
Real GDP growth was 0.2% in the December quarter and 1.5% in year-ended terms, marking a material slowing of momentum in 2023. Alongside the strong rebound in population growth post the pandemic, output in per capita terms has contracted. Meanwhile, despite picking up over the back half of the year, measured productivity growth was also weak in 2023.
Household consumption growth had effectively stalled by year-end, the driving factor behind the economic slowdown, as pressures from the higher cost of living, rising tax payments, and interest rate rises intensified. In response, households curbed demand for discretionary-related goods and services over the past year (-1.6%) to continue to purchase the essentials (1.2%).
Dwelling investment has weighed on growth over the past year. Rising prices for labour and materials, trade shortages, and higher interest rates have all contributed to weakness in home building activity. Business investment (8.3%Y/Y) and public demand (4.7%Y/Y) remained strong, with these components underpinning economic growth. Key factors behind this strength have been non-residential construction work and the pipeline of public infrastructure projects. Net exports had also supported growth on the back of spending by overseas tourists and students.
A preview: Domestic demand remains under pressure
Growth in many advanced economies was subdued in early 2024, though the US remained the notable exception. In Australia, the incoming data has pointed to another soft outcome for quarterly growth. Pressures faced by households associated with the higher cost of living and tighter monetary policy continued to weigh on consumption growth in Q1. Retail sales volumes declined in the quarter and other indicators of discretionary spending showed further weakness.
Conditions in the labour market continued to remain broadly resilient to slowing growth. Employment reaccelerated to post its strongest quarterly increase in 12 months. Alongside the boost to participation from the growth in the population, the strength in employment helped to limit the rise in the unemployment rate to around 4% from the cycle lows of 3.5% in late 2022. Broader measures of labour force underutilisation have also softened but remain at historically low levels.
Disinflationary progress lost momentum in early 2024 - not unlike the US - though there were signs that wages growth had peaked and recent productivity outcomes had improved. The RBA has kept the cash rate unchanged since last November at 4.35%, maintaining that policy is restrictive and calibrated appropriately to gradually return inflation to the midpoint of the 2-3% target band.
Despite the effect of higher interest rates, housing prices have continued to rise as strong demand associated with population growth has come against tight supply. Since reaching a cycle low in early 2023, the national median housing price has risen by more than 11%. The fastest pace of gains have come in the mid-sized Brisbane, Perth and Adelaide markets. Meanwhile, rental vacancy rates remain at very low levels across the nation.
Summary of key dynamics in Q1
Household consumption — Consumption growth remained subdued as cost-of-living pressures and higher interest rates continued to weigh on discretionary demand. Retail sales volumes contracted by 0.4% in Q1, driven by weakness in non-food volumes (-0.7%).
Dwelling investment — Weakness persisted in residential construction activity in early 2024. New home building and alteration work declined, the latter retracing to late 2020 or pre-Covid stimulus levels.
Business investment — Private sector capital expenditure expanded by a solid 1% in the March quarter, driven by a strong 3.3% lift in equipment investment.
Public demand — Provided a broadly neutral impulse to growth in the quarter. Government expenditure continues to increase, though public investment has slowed.
Inventories — Despite a weak demand backdrop, inventory rebuilding in Q1 added around 1ppt to quarterly growth. This is moderated by a 0.3ppt deduction from public sector inventories.
Net exports — A 5.1% broad-based rebound in import volumes to drive a 0.9ppt deduction to growth from net exports. Export volumes lifted by a modest 0.7%.
