Australia's National Accounts for the September quarter are due for release today (4/12) at 11:30am (AEDT). Growth was subdued over the first half of 2024; however, more encouraging signs began to emerge around households in Q3 as inflation cooled and fiscal support measures came into effect. Expectations are for the Australian economy to have expanded by around 0.5% in the quarter.
A recap: Growth stuck in slow lane
Growth in the Australian economy remained in the slow lane in the June quarter as real GDP increased by just 0.2%, easing annual growth (1.0%) to lows outside of the Covid period since the early 1990s. Higher interest rates and elevated inflation have been major headwinds to growth, dampening household spending and pressuring corporate profit margins. The RBA has remained a hawkish outlier amid the global easing cycle, highlighting that demand-supply imbalances (despite slower growth) and weak productivity pose upside risks to inflation.
Public demand - a key underpinning of growth over the past year - remained robust in Q2 (0.8%), bolstering the economy from stalling private demand (0%). Household consumption was weak in the June quarter falling by 0.2% on a pullback in discretionary-related demand (-1.1%), evident in categories such as hospitality services and travel. Cooling inflation has enabled real incomes to stabilise from the substantial declines in 2022 and 2023; however, interest rates remain elevated and the saving rate is low - factors that have made households reluctant to spend in non-essential areas.
Higher interest rates have also weighed on residential construction activity and components of business investment. Reduced spending by overseas visitors and students - reflected in weaker contributions to growth from net exports - has also played a role in the economic slowdown.
Q3 preview: Households beginning to stir
The global backdrop remained challenging for Australia as commodity prices declined and weak growth forced the hand of major central banks to ease monetary policy during Q3. Outside of the US, growth in advanced economies was subdued as household consumption remained under pressure. In China, lacklustre growth prompted the authorities to announce a range of monetary and fiscal stimulus measures.
In Australia, the dynamics became more favourable for household consumption during Q3. Real incomes were supported by a range of factors including ongoing resilience in the labour market; a sharp slowing in inflation due to government rebates on electricity bills; and the Stage 3 tax cuts. In response, consumer sentiment was lifting into year-end, rising from the very pessimistic levels of the past couple of years.
Quarterly retail sales volumes rose at their strongest pace (0.5%) since the middle of 2022 driven by growth across the discretionary categories (0.9%). Spending on services also showed signs of stronger growth in Q3.
Labour market conditions continued to defy the slower growth backdrop, supporting household consumption. Employment, on net, accelerated by nearly 157k or 1.1% in the quarter - its sharpest increase since early 2023 - generating a 0.8% lift in hours worked. Strong employment growth has held the unemployment rate to low levels just above 4% as labour force participation increased to record highs.
Summary of key dynamics in Q3
Household consumption — Real incomes have stabilised, and the Stage 3 tax cuts and government rebates started to flow through in Q3. There are tentative signs that these factors supported a modest rebound in household consumption; retail sales volumes rose by 0.5% in the quarter on discretionary-led gains in clothing and footwear and household goods.
Dwelling investment — An increased inflow of dwelling approvals and an easing of capacity constraints saw residential construction activity rise by 1.9% in the quarter, its strongest outturn since late 2022.
Business investment — Private sector capital expenditure lifted by a solid 1.1% in Q3 following a decline in the previous quarter. Responding to capacity pressures and investing in new capabilities in data centres and manufacturing are key priorities for Australian firms.
Public demand — Expanded at a robust 2.1%q/q pace, driving GDP growth in the quarter. Federal and state government cost-of-living support measures were a key driver of public spending (1.4%). New investment surged (5.3%) following two consecutive quarterly declines, supported by the large pipeline of public infrastructure work.
Inventories — Deducted 0.4ppt from quarterly growth. Private non-farm inventories were a headwind as inventory overhangs were run down in consumer-facing sectors. This was partly offset by a modest contribution from public sector inventories (0.1ppt).
Net exports — The external sector added a modest 0.1ppt to output in Q3. Export volumes (0.2%) were supported by a rebound in resources shipments (1.7%), while imports contracted (-0.3%) on weakness in fuel and consumer goods.
