After slowing materially last year, momentum in the Australian economy was weak in early 2024. Real GDP increased by a softer-than-expected 0.1% in the March quarter (consensus was 0.2%), slowing growth from 1.6% to 1.1% through the year. Excluding the pandemic period, this is Australia's slowest annual growth rate in 32 years. Growth is now also tracking below the RBA's forecasts from its May Statement on Monetary Policy.
The slowdown in Australia reflects global trends. Headwinds to growth from falling real incomes and monetary policy tightening have weighed on many peer economies; however, growth in Australia remains respectable by global standards.
In Australia, the public sector, through cost-of-living support and infrastructure investment, has played an important role in bolstering the economy as private demand has slowed. As a result, domestic demand growth (0.2%q/q, 2.3%Y/Y) remains stronger than headline GDP growth.
A key aspect of these National Accounts was historical revisions that indicate household consumption growth has been more resilient than previously estimated by the ABS. However, it also means that a greater proportion of the stock of excess savings accumulated by households during the pandemic has been drawn upon to support consumption. Households are benefitting from an improving real income dynamic, but the forthcoming stage 3 tax cuts and the support measures included in recent the Federal budget will also need to gain traction.
While the RBA maintains that there is excess demand in the Australian economy, slowing growth is reducing this imbalance. Inflation remains elevated to the 2-3% target band, but the labour market has softened over the course of the past year. Overall, the cash rate (4.35%) looks to be at its peak and off the back of these soft growth figures, markets have started to reprice prospects for a rate cut by year-end.
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National Accounts — Q1 | Expenditure: GDP (E) 0.1%q/q, 1.2%Y/Y
Household consumption (0.4%q/q, 1.3%Y/Y) — Lifted modestly by 0.4% in the quarter to be up by 1.3% through the year. Although consumer demand is tepid (and declining on a per capita basis), it is significantly stronger than previous estimates implied following backward revisions to tourism-related spending by Australian residents overseas. The main dynamic in the quarter was a 1.1% acceleration in services consumption (2.4%Y/Y) - its strongest rise since Q4 2022 - supported by overseas travel and strong attendances at major live events including the Taylor Swift Eras Tour and the Australian Formula 1 Grand Prix. By contrast, goods consumption contracted by 0.7%q/q (-0.6%Y/Y) as new vehicles (-2.4%) and household furnishings and equipment (-0.5%) retraced.
Real disposable incomes were flat in Q1 - a 1.1% rise in gross income was matched by quarterly inflation based on the household consumption deflator - but slightly positive over the past year (0.5%). An improved picture around real incomes from the historic contraction endured between Q3 2022 to Q3 2023 is a key factor now supporting consumption. Together with a continuation of robust labour market conditions - labour income was up a further 0.9%q/q (6.9%Y/Y) - and a reduction in the household saving ratio from 1.6% to 0.9%, real consumption was able to expand in Q1 despite flat real incomes.
Dwelling investment (-0.5%q/q, -3.4%Y/Y) — Residential construction activity remained under pressure contracting by 0.5% in the March quarter and by 3.4% through the year. Capacity constraints in the availability of skilled trades - a legacy of the pandemic - and weak demand - reflecting the impacts of higher interest rates and cost increases - have weighed on activity. New home building contracted by 0.6%q/q (-1.6%Y/Y) while alterations declined by a further 0.5%q/q (-6%Y/Y) - retracing to pre-Covid stimulus levels from late 2020.
Business investment (-0.7%q/q, 3.9%Y/Y) — Posted its first quarterly contraction (-0.7%) since Q3 2021 and its weakest outcome in 3.5 years, reducing annual growth from 8.8% to 3.9%. The upswing in non-residential construction of the past 3 years or so was held back by constraints in Q1 falling 4%, with declines in building (-3.1%) and engineering work (-4.8%). By contrast, equipment investment advanced by 2%q/q, driven by increased capital expenditure on data centres.
Public demand (0.6%q/q, 4.5%Y/Y) — Remains elevated as a share of GDP post the Covid period, providing a key support to growth as private demand has slowed. Public demand increased by a further 0.6% in the March quarter to be up by 4.5% over the year. This was driven by government expenditure (1%q/q) associated with medical services spending and cost-of-living support measures for rents and energy bills. Public investment declined (-1.2%q/q) for the second quarter in succession; however, it has risen over the past year (5.9%) as progress in the rollout of infrastructure projects (including in renewable energy) has ramped up.
Inventories (0.7ppt in Q1, -0.3ppt yr) — Added 0.7ppt to quarterly activity, but a modest headwind to growth over the past year (-0.3ppt). Non-farm inventories expanded by $2.6bn, led by imported consumption and intermediate (used in production) goods. Mining inventories lifted on increased production.
Net exports (-0.9ppt in Q1, -0.7ppt yr) — Deducted 0.9ppt from growth in Q1 - the largest drag on output from net exports since Q3 2022. Import volumes accelerated by 5.1% quarter-on-quarter (7.4%Y/Y), more than rebounding from a 3.5% decline in Q4. The rebound was driven by a broad-based lift in imported goods (6.5%), including machinery and industrial equipment (9.1%). Services imports saw a modest rise (0.7%) following a large decline in the previous quarter (-4.5%). Exports underwhelmed with a 0.7% rise in Q1 (3.2%Y/Y) following a 1.3% fall in Q4. A 1.1% rise in goods exports was led by non-rural goods (1.4%), with resources advancing (1%) on strong demand for Australian LNG. By contrast, services exports saw their second decline in succession (-1.1%q/q) on signs that the boost to spending from overseas students and tourists is fading.
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National Accounts — Q1 | Incomes: GDP (I) 0.2%q/q, 1.1%Y/Y
National income growth moderated in the March quarter as prices of key commodity exports declined. The terms of trade were little more than flat in Q1 (0.2%) but are down by 7.2% through the year and 12% off the record high in mid-2022. Export prices saw a 1.8% fall in the quarter, driven by lower commodity prices due to weaker global demand. However, this was attenuated by import prices declining by 2%q/q alongside falling oil prices and a stronger Australian dollar.
Nominal GDP lifted by 1.4% in the quarter, a similar increase to the previous three quarters. However, base effects slowed the annual growth rate from 4.5% to 3.5%, down from a 9.5% pace a year earlier.
Turning to company profits, private sector non-financial corporations gross operating surplus lifted 2.2% in the quarter - against a 7.3% decline over the year. In Q1, profits were driven by professional and technical services to support increased investment in data centres, and by accommodation and food services associated with the major concerts and sporting events held across the nation. Financial corporations operating surplus saw a 1.3%q/q rise to 6.9%Y/Y, with the effects of higher interest rates boosting banks' net interest margins.
For wage incomes, compensation of employees advanced overall by 1% in Q1 and 7.1% in year-ended terms, down from 8.4% previously. The main driver of the increase was the public sector (1.6%q/q), boosted by backpay and pay rises in Commonwealth agencies and by state government increases to pay for health and education workers. Private sector wages (0.9%q/q) were supported by bonuses and redundancy payments.
Productivity growth remains weak; however, it has improved over recent quarters. A 0.1% increase in Q1 followed gains of 0.5% (Q4) and 1.1% (Q3). Alongside this, unit labour cost pressures have moderated, a welcome development for the RBA.
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National Accounts — Q1 | Production: GDP (P) 0.1%q/q, 1.0%Y/Y
The March quarter production estimate of GDP was 0.1%, slowing from 1.6% to 1% at an annual rate. Gross Value Added (GVA) by services industries increased by 0.2%q/q compared to a 0.4%q/q contraction from goods-related industries.
In the services sector, household services (0.5%) led the way. This included a 2.7% boost from arts and recreation associated with the major sporting events and concerts hosted during Q1 and from national lottery draws that increased gambling activity. Business services were soft overall (-0.1%q/q) as reduced labour hire activity weighed on administration (-0.5%), and information media and telecommunications declined (-1.5%) as advertising was scaled back.
Large declines in a couple of key industries weighed on the goods sector. Goods production (-0.3%) weakened on the back of a 2.6% fall in construction, with construction services, non-residential construction and heavy and civil engineering all contributing to the decline. Meanwhile, weakness in goods distribution (-0.4%) was driven by a 2% fall in wholesale trade as new vehicle sales slowed.
