The Australian economy expanded at its fastest quarterly pace in 2 years as real GDP increased by 0.6% in the December quarter, in line with forecasts. This outcome lifted growth through the year from 0.8% - a 30-year low outside the Covid shock - to 1.3%. Although this is a little stronger than the RBA's forecast (1.1%), growth has been running below official estimates of trend (around 2.5%) for much of the past couple of years.
The uplift in quarterly GDP in Australia occurred somewhat against the tide as growth across the OECD slowed into year-end. A key dynamic was increased uncertainty around the outcome of the US Presidential election last November. However, growth lifted in parts of Asia including Japan and China.
In the domestic economy, growth improved as 2024 progressed, output lifting from a 0.4% pace in the first half of the year to 0.9% across the back half. But that lift was driven by public demand and net exports - components that are not necessarily reflective of the underlying momentum of activity.
Public demand (5.5%Y/Y) has been the mainstay of growth over the past year, bolstering the economy from weakness in private demand (0.8%Y/Y). The malaise of cost-of-living pressures and higher interest rates have weighed on household consumption; business investment has plateaued; and residential construction is subdued reflecting the interest-rate sensitivity of the sector and capacity constraints.
In its recent February Statement on Monetary Policy, the RBA forecast GDP growth to pick up to a 2.4% year-ended pace in 2025. Key to this will be the re-emergence of the consumer. There were tentative signs of improvement within household consumption in the December quarter, supported by the Stage 3 tax cuts, cost-of-living measures and rising real incomes. The RBA's February rate cut provides some additional support, but pressures remain significant with interest and tax payments remaining at an elevated share of income.
Market pricing has the RBA cash rate on a declining path to around 3.5% by year-end from its current level of 4.1%. Recent communication from the RBA indicates the Board is taking a cautious approach and will need to see further progress on inflation prior to cutting rates again, while weakness in productivity - GDP per hour worked fell by 1.2%Y/Y - has not helped the situation. However, lower rates through 2025 does look like the most likely course of action.
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National Accounts — Q4 | Expenditure: GDP (E) 0.7%q/q, 1.3%Y/Y
Household consumption (0.4%q/q, 0.7%Y/Y) — Following consecutive declines in Q2 (-0.2%) and Q3 (-0.1%), household consumption rebounded tentatively with a 0.4% lift in the December quarter. This suggests that slowing inflation and fiscal support measures, which include the Stage 3 tax cuts and electricity rebates, are gaining some traction with households; however, the effect has been modest as caution has prevailed.
Tax relief and other fiscal support measures have helped drive real incomes up by 1.9% through the year to Q4, lifting from a 0.4% pace a year earlier. Alongside this, year-ended consumption growth is little changed, and has in fact eased a little from 0.9% to 0.7% across that period. Meanwhile, the household saving ratio has lifted from 2.8% a year ago to 3.8% in Q4 - its highest since Q3 2022 - indicating much of the income boost has been saved.
All components of the consumption basket rose in Q4: goods up 0.6% and 0.3% for services, while essentials lifted 0.5% and discretionary spending increased 0.4% - a first since Q2 2023. Most notably, discretionary consumption - which had been cut back by households - is now showing a modest but clear improvement in momentum. Consumption in this segment lifted by 0.5% through the back half of the year, up from a flat first half of 2024 (0%) and a sharp decline in the second half in 2023 (-1.0%). Areas of discretionary consumption that performed in Q4 were clothing and footwear (1.3%) and furnishings and household goods (1.9%), gains indicative of price-sensitive households turning out strongly for the Black Friday sales. Meanwhile, hotels, cafes and restaurants saw its strongest increase (1.5%) since Q2 2023, supported by major sporting events.
Dwelling investment (-0.4%q/q, 2.5%Y/Y) — Contracted by 0.4% in the December quarter; however, after rising through the first 3 quarters of 2024, residential construction activity lifted by 2.5% through the year, its fastest pace in 3 years. The soft finish to 2024 was attributed to the return of cost pressures and labour constraints. Both new home building (-0.1%) and alteration work (-0.9%) turned in their weakest quarterly outturns in a year.
Business investment (0.5%q/q, 0.3%Y/Y) — Rebounded from a 0.4% decline in the September quarter to rise by 0.5% in December quarter. Overall, business investment plateaued in 2024 as year-ended growth slowed from an 8.8% pace a year ago to 0.3% in Q4. This has occurred around diverging movements. Non-residential construction - impacted by capacity constraints and higher interest rates - has pulled back (-4.5%Y/Y), equipment and machinery investment has levelled out (0.8%Y/Y), while other areas of investment - led by intellectual property products - advanced at a robust pace (9.5%Y/Y).
Public demand (1.0%q/q, 5.5%Y/Y) — Growth in public demand slowed to a 1.0% rise in Q4, down from a 2.5% lift in Q3; however, base effects saw growth over the year step up from 4.4% to 5.5% - its fastest pace in 2½ years. Public demand has been the stronghold for growth in the domestic economy over the past year, directly adding 1.3ppts to GDP growth. In the latest quarter, government expenditure advanced by 0.7% (5.1%Y/Y), driven by state and local government spending on key services (health, education and policing). Public investment (excluding transfers) rose by 2.2% in Q4 to be up 7.7% through the year, supported by the large pipeline of transport, water and renewable energy infrastructure projects.
Inventories (0.1ppt in Q4, 0.2ppt yr) — Made a broadly neutral contribution of 0.1ppt to quarterly growth. Private non-farm inventory levels increased during Q4 ($123m) on builds in the mining ($204m) and retail sectors ($223m), the latter reflecting the arrival of hybrid and electric vehicle imports. There were largely offsetting movements in public authorities and farm inventories in the quarter.
Net exports (0.2ppt in Q4, -0.8ppt yr) — The external sector added 0.2ppt to quarterly GDP but has been a headwind to growth over the past year (-0.8ppt). In the latest quarter, export volumes lifted modestly by 0.7% - their strongest gain nonetheless in 5 quarters - as base effects swung year-ended growth from -1.2% to 1.7%. Services (3.4%) drove quarterly exports as inbound travel picked up (1.2%). Meanwhile, goods exports were broadly flat (0.1%) as an acceleration in rural goods (6%) helped offset softness from commodity exports (-0.7%).
Import volumes were up by just 0.1% in the December quarter (5.8%Y/Y), plateauing over the back half over the year (-0.1%) following strong growth in the first half (6%). Goods imports advanced by 1.1% in Q4 supported by hybrid and electric vehicles. This was largely offset by a 2.5% decline in services imports as a weaker Australian dollar weighed on overseas travel.
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National Accounts — Q4 | Incomes: GDP (I) 0.5%q/q, 1.3%Y/Y
External dynamics had been a headwind for Australia for much of 2024 but turned more favourable into year-end. Growth in China picked up on the back of stimulus measures, driving up prices for Australian iron ore and LNG exports. Accordingly, export prices lifted by 2.5% quarter-on-quarter, underpinning a 1.9% rise in the terms of trade in Q4 - its first increase in a year and a boost for national income.
With the terms of trade rebounding, nominal GDP increased by 1.6% in Q4 - its fastest rise since Q2 2022 - as year-ended growth firmed a little from 3.5% to 3.7%. The rise in nominal GDP of 1.6% reflected a 1.0% lift in economy-wide prices and the 0.6% increase in real output.
Higher commodity prices together with strong crop yields in grain harvesting bolstered corporate profits in the December quarter. After falling sharply in Q2 (-3.2%) and Q3 (-4.1%), private sector non-financial corporations gross operating surplus saw a modest rebound of 0.6% quarter-on-quarter. However, that still left profits down by 5.3% over the past year, reflecting the earlier retracement in commodity prices and margin pressures. Small business profits (gross mixed income) were broadly flat rising by 0.2% in Q4 (0.9%Y/Y). Financial corporations gross operating surplus continued to rise solidly, up by a further 1.8% in Q4 to be 5.7% higher through the year.
Continued strength in the domestic labour market drove wage incomes further. Compensation of employees rose by 2.0% in the quarter to a 6.1% year-ended pace, up from 5.6%. Private incomes (1.9%q/q) slightly underperformed but were supported by a pick-up in activity and bonuses in industries including transport and construction. In the public sector, wage incomes were up 2.4%q/q driven by wage increases, bonuses and increased employment.
Staying with wage dynamics, unit labour costs had been on an easing trend since the middle of 2023 but picked up into the end of 2024. Non-farm unit labour costs lifted from 4.5% to 5.4%Y/Y on a nominal basis and from 1.7% to 2.7%Y/Y in real terms. Playing a role in these increases has been weakness in productivity (-1.2%Y/Y).
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National Accounts — Q4 | Production: GDP (P) 0.5%q/q, 1.2%Y/Y
Turning to the production approach to GDP, the services sector (0.4%q/q, 1.5%Y/Y) continued to lead the way over the goods sector (0%q/q, -0.5%Y/Y).
Strength in services was broadly based in the December quarter, up by 0.5% across household services and 0.3% in business services. Drivers of growth in household services included accommodation and travel (0.6%) on increased overseas tourist arrivals; education and training (1.1%); and health care (0.5%). Business services were supported by finance and insurance (1.0%) - associated with banking activity and superannuation services - and administration (0.8%) and hiring services (0.6%).
In the goods sector, a 1.4% lift in goods distribution was moderated by a 0.7% decline in goods production. Goods distribution was led by a strong gain in the transport industry (3.0%) following a strong grain harvest and by increased air travel. Retail (0.6%) also advanced on a strong Black Friday sales event. Standing out amid the overall decline in goods production was utilities with a 3.0%q/q rise as warm weather drove up electricity demand. This was more than offset by declines across construction (-1.3%) and manufacturing (-2.3%).
