Commodity prices retreated further
Australia’s terms of trade (the ratio of export to import prices) decreased by 7.9 per cent in the June quarter, reflecting a sharp fall in export prices (-8.2 per cent) relative to import prices (-0.3 per cent). This was largely driven by falling commodity prices for coal, LNG and iron ore due to a warmer than usual northern hemisphere winter and reduced demand from China. Overall, commodity markets softened as indicated by the 13.8 per cent fall in the Reserve Bank’s Commodity Price Index in the quarter.
The decline in import prices was mostly driven by falls in petroleum and fertiliser prices over the quarter, partly offset by price increases for gold and specialised machinery.
Health and transport infrastructure investment continued to support growth
Public demand increased through the quarter, contributing substantially to the growth outcome.
Government consumption rose by 0.4 per cent in the June quarter, up 1.4 per cent through the year. Spending was driven by the Federal Government, up 1.0 per cent in quarter, and was mainly non-defence spending.
Public investment was up a very solid 8.2 per cent in the June quarter, the highest quarterly growth rate in six years, after increasing 3 per cent in the previous quarter.
Federal, state and local governments contributed to this rise. National defence investment was up more than 16 per cent, and health and transport infrastructure investment also contributed to the rise through projects such as Snowy 2.0, the Western Sydney Airport, Brisbane’s Cross River Rail and Inland Rail.
Company and personal income tax receipts were very strong reflecting las year’s strong growth rate and this helped fund the public sector's investment spending. Company tax collections increased more than 30 per cent through the year to the June quarter, while personal income taxes increased more than 15 per cent.
Businesses continue to invest despite falling profitability
Private investment increased 0.6 per cent through the quarter, driven by a rise in new machinery and equipment (up 4.2 per cent) as businesses continued to invest in vehicles and other transport equipment. However, the construction industry saw investment decline.
Private sector investment intentions remained robust, despite the current economic challenges. Capex intentions for 2023-24 were over 7 per cent higher than the third reading for 2022-23. However, because this is in nominal terms, some of this growth reflects expected increases in the cost of capital goods and construction.
International students and tourists continue to flock to Australia
Net exports contributed strongly to growth, helped by international students and tourists flocking to Australia.
Exports grew 4.3 per cent through the June quarter, the biggest driver being travel services which increased 18.5 per cent. The number of international students and tourists continues to recover from the pandemic, with travel exports at 88 per cent of pre-pandemic levels. Mining exports also contributed to the strong result with improved weather and a further easing of supply constraints allowing for higher export volumes.
Imports increased 0.7 per cent through the quarter. Equally, travel services were the largest driver of this result as Australians travelled overseas, adding 11 per cent to international travel imports in the June quarter. Goods imports fell, driven by telecommunications equipment, clothing and footwear and electrical items, with these changes directly related to weaker consumer spending.
Despite net exports contributing to growth in the June quarter, there are downside risks to this source of economic growth given China’s slowdown and falling in prices for some of Australia’s major commodity exports.