Momentum in the Australian economy remains subdued in the face of higher interest rates and the cumulative effects of cost-of-living pressures over the past couple of years. Real GDP growth was 0.2% in the June quarter - in line with expectations - expanding by just 0.4% through the first half of 2024. Year-ended growth softened from 1.3% to 1.0%, running below official estimates of trend growth (around 2.5%) for more than a year and at its slowest pace outside the Covid period since the recovery from the downturn in the early 1990s.
In the context of the strong rebound in population growth post the pandemic, underlying growth is weak with per capita GDP contracting for the 6th quarter in succession (-0.4%) to be down 1.5% through the year.
Global headwinds have been a contributing factor to slowing growth in Australia. Most advanced economies offshore also saw subdued growth over the first half of the year - the US a notable exception - while China was impacted by flooding and heatwaves and ongoing weakness in the property sector.
Domestically, the transmission of the RBA's tightening cycle is weighing on activity following the 425bps increase in the cash rate between May 2022 and November last year. Private demand is weak (0%q/q, 0.8%Y/Y) with higher interest rates restraining household spending and also weighing on residential construction and business investment. By contrast, growth in public demand is robust (0.8%q/q, 3.4%Y/Y) - a legacy from the pandemic - holding a sharper slowdown at bay.
In the near term, a rebound in household real incomes holds the keys to unlocking stronger economic growth. Inflation, though still elevated to the RBA's 2-3% target range, is coming down and fiscal support via the Stage 3 tax cuts and cost-of-living support measures started to flow early in Q3. The prospect of lower interest rates - another element that would boost household spending - continues to be resisted by the RBA; however, this is on the horizon with the global easing cycle ramping up.
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National Accounts — Q2 | Expenditure: GDP (E) 0.1%q/q, 0.9%Y/Y
Household consumption (-0.2%q/q, 0.5%Y/Y) — With households increasingly feeling the effects of the higher cost of living and the RBA's hiking cycle, consumption contracted by 0.2% in the June quarter. Year-ended growth moderated from 1.2% to 0.5% - its weakest pace outside the Covid period since the global financial crisis of 2008/09.
Major sporting and entertainment events boosted discretionary-related consumption Q1 (1.0%); however, that reversed in the June quarter as households started to cut back (-1.1%). The main categories in which this was evident were in travel -4.4%; hotels and restaurants -1.5%; new vehicles -2.6% and clothing and footwear -1.6%. By contrast, essentials-related consumption continued to rise (0.5%).
Turning the focus to incomes, household disposable income increased by 0.9% in the quarter and 4.9% over the year. However, while easing, inflation eroded most of those gains, leaving real disposable income up just 0.1% in quarter-on-quarter terms and 0.5% year-on-year. Labour income is running at a strong pace (1.0%q/q, 6.2%Y/Y) reflecting the underlying resilience of the labour market but is being offset by bracket creep - tax payments rose 3.1%q/q and 6.6%Y/Y - highlighting the importance of the stage 3 tax cuts ahead in Q3. Given these crosscurrents, the household saving ratio was unchanged in the June quarter at a very low 0.6%.
Dwelling investment (0.1%q/q, -3.0%Y/Y) — Although rapid population growth is underpinning strong demand for housing, residential construction activity was broadly flat in Q2 (0.1%) and contracted over the past year (-3.0%). Headwinds from higher interest rates, capacity constraints in skilled labour and materials - legacies of the pandemic - and increased insolvencies are all slowing the pace at which the sector working through what is an elevated housing pipeline. In Q2, new home building lifted by 0.6% but was still down 2.4% over the year. The volume of alteration work (-0.8%q/q) continues to retrace from the high levels seen during the pandemic falling by 3.9% in year-ended terms.
Business investment (0.1%q/q, 2.2%Y/Y) — A broadly flat outcome in Q2 (0.1%) confirmed a loss of momentum in business investment over the first half of the year (-0.2%). Throughout 2023, business investment ran at an upbeat pace and was a major driver of economic growth. The momentum has turned with non-dwelling construction weakening over the first half (-3.2%), despite rising in Q2 (1%) as work on datacentres and mining projects commenced. Equipment investment saw a 1.6% fall in Q2 as firms delayed non-essential purchase decisions but still lifted by 0.9% across the first half.
Public demand (0.8%q/q, 3.4%Y/Y) — Public demand lifted by a further 0.8% in the quarter, remaining a key countercyclical support to growth with private demand slowing. Over the past year, public demand has increased by 3.4%, directly contributing 1ppt to economic growth. In the June quarter, government expenditure (1.4%) rose at its fastest pace in a year on cost-of-living support measures, spending on major government programs (such as the NDIS) and public sector employment. This more than offset a slowdown in new investment (-2.2%) as transport and health projects being rolled out by state and local governments moved closer to completion.
Public demand as a share of output continues to rise, now exceeding its highs seen during the pandemic when governments responded rapidly to the crisis with emergency fiscal support measures.
Inventories (-0.3ppt in Q2, 0.7ppt yr) — Subtracted 0.3ppt from growth in the latest quarter but added 0.7ppt over the past year. A much smaller build-up in private non-farm inventories this quarter ($0.2bn) relative to Q1 ($3.0bn) cut 0.5ppt from GDP growth. This was moderated by a 0.3ppt contribution from public authorities inventories, which increased following a drawdown in the March quarter.
Net exports (0.2ppt in Q2, -1.2ppt yr) — The net exports component swung from a sizeable weight on activity in Q1 (-0.9ppt) to contribute a modest 0.2ppt to Q2 GDP. Over the past year, international trade has weighed heavily on economic growth as the post-pandemic rebound in exports has slowed (0.1%Y/Y) while imports, boosted by overseas travel, have continued to rise solidly (5.2%Y/Y).
Export volumes in the June quarter lifted by a modest 0.5% as a rise in services exports (5.6%) was largely offset by a decline in goods (-0.5%). Services exports remain supported by overseas tourists and students, though the post-pandemic recovery has mostly run its course by now. Goods exports were weighed by weakness in resources (-0.4%) on declines in shipments of coal (-1.1%) and LNG (-2.2%).
After rising sharply in Q1 (6.1%), imports came in slightly lighter in the June quarter (-0.2%). A lift in services exports (0.5%) was underpinned by overseas travel to Europe during the northern summer. Meanwhile, a pullback in capital goods purchases by firms (-2.7%) drove a decline in goods imports (-0.4%).
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National Accounts — Q2 | Incomes: GDP (I) 0.2%q/q, 1.0%Y/Y
The real GDP income estimate came in at 0.2% in the June quarter, easing from a 1.3% pace to 1% in year-ended terms. Taking a broad perspective, a key development for national income in the latest quarter was a sizeable 3.1% decline in the terms of trade. This was driven by a 3% fall in export prices in Q2 as coal and iron ore prices retraced, with import prices holding flat.
As a result of the drag from the terms of trade, nominal GDP growth slowed sharply to a 0.2% rise in Q2, well down from Q1's 1.2% rise, with corporate profits also taking a hit.
Private sector non-financial corporations profits fell by 2.8% in the quarter (-3.8%Y/Y), weighed by the weakness in the mining sector stemming from lower commodity prices. Another relevant factor that dragged on profits was the arts and recreation sector seeing profits slide after the boost major events provided in Q1. Financial corporations profits posted a further 1% rise in the quarter to be up 6.5% for the year, with higher interest rates boosting net interest margins. Gross mixed income - small company profits - rose by 1.2%q/q (0.4%Y/Y).
The picture around wage incomes remains solid, supported by resilient labour market conditions. Compensation of employees (CoE) posted a 0.9%q/q rise to be running at a 6.3%Y/Y pace. Within this, public sector CoE accelerated by 1.4% in the quarter, underpinned by new enterprise agreements coming into effect across Commonwealth and state government agencies, while increased employment lifted private sector CoE by 0.7% in Q2.
Unit labour cost growth picked up in the June quarter alongside weak productivity outcomes. GDP per hour worked fell by 0.8% in Q2, seeing nominal unit labour costs rise by 1.2%q/q, up from a 0.4% rise Q1, while real unit labour costs saw a 1.3% rise. In annual terms, weakness in productivity growth at 0.4% underscores the RBA's caution around returning inflation to the 2-3% target band in a timely manner with unit labour costs at a 5.4% pace.
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National Accounts — Q2 | Production: GDP (P) 0.3%q/q, 1.0%Y/Y
The production estimate for GDP in the June quarter was 0.3% and 1.0% at an annual rate, down from 1.3%. Gross Value Added (GVA) by industries in the services sector outperformed their counterparts in goods-related areas.
Looking at services industries, business services lifted by 0.5% overall for the quarter, up 1.7% across the year. Leading the way, telecommunications advanced (1.6%q/q) on increased software demand, while administration (0.8%q/q) was supported by labour hire activity. Household services posted a 0.3%q/q rise (1.7%Y/Y). The main contributors to this growth in Q2 were the education (0.6%) and health care industries (0.4%). This offset weakness in arts and recreation (-0.7%) from a reduction in major events and gambling activity and accommodation and food services (-0.3%) due to weaker demand at venues.
Over in the goods industries, the goods production segment posted a 0.2%q/q increase. This was supported by rising demand for utilities (1.3%) as well as increased output from manufacturing (0.7%) and construction (0.5%). Goods distribution ticked up by 0.1% in the quarter. A 0.6% lift in the transport and postal sector - including increased overseas travel - was largely attenuated by weakness in retail trade (-0.3%) as households remained under budgetary pressures.
