The Australian National Accounts for the June quarter are due to be published by the ABS at 11:30am (AEST) today. Real GDP growth almost came to a standstill in the March quarter as the economic slowdown extended into 2024. Headwinds to growth continued to prevail in Q2, with a subdued outcome of around 0.2% for quarterly GDP anticipated. The focus remains on the household sector as the adjustment to higher interest rates and the increased cost of living continues to play out.
A recap: Slowdown extends into 2024
Real GDP growth slowed to 0.1% in the March quarter, moderating annual growth from 1.6% to 1.1%. This was the weakest annual growth rate outside of the Covid period since 1992. Growth has slowed alongside the normalisation of the post-Covid rebound and as domestic and international headwinds have taken effect. Domestically, the main dynamic has been cost-of-living pressures and higher interest rates weighing on consumption. Reflecting this, real GDP in per capita (population-adjusted) terms has been weak contracting by 1.3% over the past year.
A key theme in Australia over the past year has been the strength in public demand (4.5%Y/Y), which has encompassed spending on major government programs and infrastructure investment. This has averted a sharper economic slowdown with private demand cooling (1.5%Y/Y).
Although historical revisions made by the ABS led to an uplift in household consumption growth over recent quarters, the pace in Q1 was subdued at 0.4% quarter-on-quarter and 1.3% year-on-year. The higher cost of living and the cash flow effects of increased mortgage repayments and rising tax payments have driven a significant decline in the household saving ratio over the past couple of years.
As a result of these factors, one of the main adjustments households have been making is evident in the mix of consumption spending. Households have held back from additional discretionary-related consumption (0.1%Y/Y) as the demand for essentials has continued to rise (2.1%Y/Y).
Business investment slowed in Q1 (-0.7%) but has been upbeat through the past year (3.9%) as firms have sought to increase capacity and invest in new technology. By contrast, dwelling investment remained weak (-0.5%q/q, -3.4%Y/Y), with higher interest rates, elevated building costs and capacity constraints continuing to weigh on activity.
Weaker external demand and the slowing of the rebound in domestic tourism and education saw export growth slow over the past year from an 8.3%Y/Y pace to 3.2%Y/Y in Q1. Upward revisions to import growth - relating to spending by Australians overseas - raised the pace to 7.4%Y/Y, equating to a larger deduction to growth within GDP calculations.
A preview: Headwinds to growth remain persistent
Although the global backdrop improved over the first half of 2024, headwinds domestically continued to restrain growth. Most advanced economies offshore saw a pick-up in growth following a weak back half of last year. In China, growth in the June quarter was hampered by flooding and heatwaves, while the key property sector remained weak.
In Australia, another subdued outcome for quarterly GDP appears likely. The overlay of pessimistic households continued, unabated over the past couple of years in response to high inflation and the pass-through of RBA rate hikes.
Inflation, while still elevated, continued to ease supporting an improved dynamic for real household incomes, with tax relief and government subsidies for electricity bills coming into effect in Q3. The RBA has left rates on hold (4.35%) since last November, but the Board remains alert to upside inflation risks.
Labour market conditions have remained a key support for consumption. Employment growth broadly matched the strong increase from Q1, continuing to defy the economic slowdown. This was holding down the unemployment rate and keeping the overall level of labour force underutilsation low.
Amid these crosscurrents, indicators of household spending have been consistent with subdued consumption growth in Q2. Consumption growth was driven mainly by services spending, with weakness in goods-related spending evident in a 0.3% contraction in retail sales volumes, the 6th decline in the past 7 quarters.
The fundamentals of tight supply and strong demand continued to put upward pressure on housing prices in most capital cities. Although there is a substantial volume of dwellings under construction, progress in working through this pipeline is being held back by labour constraints. At the same time, strong population growth has driven demand for housing, most notably in the capital cities where vacancy rates are at very low levels.
Source: PropTrack
Summary of key dynamics in Q2
Household consumption — Remained subdued amid cost-of-living pressures and ongoing weakness in sentiment. Retail sales volumes contracted further, with services-related spending continuing to drive consumption growth.
Dwelling investment — Headwinds from higher interest rates, elevated building costs, capacity constraints and weak sentiment are all weighing on residential construction activity. In Q2, new home building looks to have declined modestly, though alterations lifted.
Business investment — Lost momentum in Q2 and will likely weigh on GDP growth. Non-residential construction activity and equipment investment weakened.
Public demand — Public demand is expected to add 0.4ppt to Q2 GDP growth, remaining a key support to domestic demand amid weakness in the private sector.
Inventories — Set to deduct 0.3ppt from quarterly GDP, with a negative contribution from private non-farm inventories (-0.5ppt) moderated by a build in public authorities inventories (+0.2ppt).
Net exports — Added 0.2ppt to GDP growth in Q2. Exports rose modestly (0.5%) as the post-Covid rebound in tourism and education services continued. Imports were softer in the quarter (-0.2%) driven by weakness in capital goods.