Company profits rose by 2.6 per cent in the December quarter driven by a rebound in mining profits, thanks to stronger demand for iron ore and coal from China. On an annual basis, profits grew by 1.4 per cent, far below the peak in 2022, as rising input costs hit bottom lines as domestic demand softened.
Domestic price pressures are easing, but are still a cause for concern for the RBA
Australia’s terms of trade – the ratio of export to import prices – increased by 2.2 per cent in the December quarter, after falling by 2 per cent in the September quarter. The improvement occurred because the export prices rose 3.1 per cent, greater than the 0.8 per cent increase in import prices. Export prices were driven by Chinese policy stimulus supporting steel production, both raising coal prices and pushing iron ore prices above US$120 per tonne.
National Accounts measures of price pressures on the domestic economy continued to slow, but differences between international and domestic sources of price growth exist. International prices increased by 0.8 per cent in the quarter, however, over the year prices decreased by 3.1 per cent. In contrast, domestic price growth increased by 4.6 per cent over the year.
Public demand as a share of the economy remains elevated
Public demand – both consumption and investment – contributed 0.1 percentage points to growth in the December quarter. However, both government consumption and investment as a percentage of GDP remain elevated.
Government consumption rose by 0.6 per cent in the December quarter, up 2.7 per cent through the year. Spending was driven by the federal government (non-defence), up 2 per cent in the quarter, and was focused on health-related government benefits for households, plus employee expenses. Defence spending fell 3.5 per cent in the quarter, after a strong rise in September.
Public investment fell for the first time since 2022, down 0.2 per cent in the December quarter after a strong 1.7 per cent rise in the previous quarter. Infrastructure investments by public corporations, mainly at the state and local government level, was offset by falls in general government investment in transport and health infrastructure. In annual terms, public investment moderated slightly to 13.6 per cent, but remains close to the recent peak growth rate hit in 2021. Public investment will remain elevated through 2024 given the strong pipeline of public sector infrastructure projects.
Businesses continued to invest and future plans look positive
Private investment fell by 0.2 per cent in the December quarter, after a 1.5 per cent rise in the previous quarter, mainly thanks to a large fall in dwelling investment. Business investment rose by 0.7 per cent through the quarter driven by non-dwelling building construction, offsetting a 1.6 per cent fall in machinery and equipment. Business investment has ticked up a little on an annual basis from over 7.7 per cent in the September quarter to 8.2 per cent this quarter.
Despite the challenges facing the private sector – subdued growth and rising input costs and wages – investment intentions remained surprisingly robust. Capex intentions for 2023-24 were 3.8 per cent higher than the previous estimate for 2023-24. This measure is in nominal terms and so increases in the cost of capital goods and construction are likely to be a driver. The first estimate for investment plans in 2024-25 was $145.6 billion, 12.6 per cent above the same reading last year and the strongest rise since the mining boom (2012-13). However, the first estimate should be read with caution as it can be less reliable.
Net exports surprise to the upside, but it’s not a good news story
Overall net exports contributed 0.6 ppts to quarterly GDP growth, mainly because of a 3.4 per cent drop in imports.
Goods imports fell 2.8 per cent through the quarter, with declines recorded across all goods – capital, consumption and intermediate a reflection of slowing demand. Most notably, non-industrial transport equipment (cars and other personal vehicles) fell by 8.1 per cent. Service imports tumbled 5.3 per cent in the December quarter, driven by a 9 per cent fall in travel services as Australians spent less on overseas travel and visited closer destinations than in the previous quarter.
Meanwhile, goods exports fell 0.4 per cent through the December quarter, with weak rural goods exports, partly offset by strong demand for our mining commodities. Service exports rose by 0.5 per cent, as international tourists and students continued to return to Australia.
A $2.7 billion fall in private sector inventories – mainly from the mining and wholesale trade sector – was a drag on GDP, shaving 0.3 percentage points off GDP growth in the December quarter. However, the strong increase in public sector inventories provided some offset.