From the Chief Economist
The consequence of higher rates is slower growth, and we saw a continuation of this in the March quarter National Accounts.
Just reading the headline numbers might signal an economy that is slowing enough to take pressure off inflation, yet there were signals in the GDP data that inflation is not where it needs to be, even as the economy flatlined. The measure of household domestic price rises was a very high 4.6 per cent, almost unchanged from the December 2023 quarter.
There was a surge in demand for travel and accommodation around the Grand Prix as well as the Taylor Swift and Pink concerts – creating an unwelcome pressure point and leading to a stronger than expected 0.4 per cent rise in consumption in the March quarter.
Although the Reserve Bank looks through one off events, it doesn’t ignore solid demand indicators. Households saved only 0.9 per cent of their income this quarter, contributing to total savings remaining below 2.0 per cent for a year, the first time this has occurred since the Global Financial Crisis (GFC).
As the year continues, assuming there are no more rate hikes from the RBA, $23 billion of tax cuts and further cost of living measures combined with positive real wages growth means there may even be an uplift in consumption.
Business investment was soft, with a decline in mining project activity in the quarter, while the completion of some state and local government education projects and slower health projects pulled down government investment. But these reflect the lumpy nature of the data and follow recent high levels of public and private investment. Increased demand for data centres showed through in an uplift in investment in machinery and equipment, an early sign of the wave of AI-related spending in the economy. Investment intentions continue to indicate a positive outlook despite rising input costs and wages. It is likely that data needs will continue to rise across the public and private sector, with cyber security a focal point for many organisations.
Strong renewables infrastructure investment is also likely to be driving this outlook, in part fueled by government incentives. Government consumption, which has been strong since the pandemic, was up again in the quarter. Household sector assistance – including health programs through Medicare and the Pharmaceutical Benefits Scheme, as well as energy bill relief payments – explain part of this strength, as does the increased size of the Commonwealth public service.
The ABS also noted increased military exercises over the quarter lifted defence spending, although national security policy changes are also likely to be pushing up this number.
The story of the March quarter is complicated by the strong increase in imports, which pushes the GDP number lower as sales occur offshore. Goods imports – of everything from fertilisers to clothing – led the rise, a sign of improved supply chains and possibly some higher demand. Many of the imports landed in inventories though which has an opposite, positive effect on GDP. The ABS said wholesale and retail businesses accumulated $2.2 billion worth of inventories for sale in the January to March period.
Imports of services fell as Australians swapped their European holidays with closer to home destinations in Asia, especially Japan, where the exchange rate is favorable.
The mining sector has long been a strong source of growth across the economy, but the slowdown in global activity has impacted demand for iron ore, coal and lithium, with the ABS noting mining production outpaced export demand. While exports prices have been very high in recent years, the trend appears to have turned and there was a 1.8 per cent fall in the quarter.
A bright spot has been immigration, which is holding growth above where it otherwise might be. Without strong population growth, the economy would have been shrinking for over a year.
With price indicators high and some ongoing sources of inflation pressure in the households and government sectors in particular, the job of reducing the CPI to the 2-3 per cent target band clearly isn’t done. Until the sequins have been cleared off the floor, we can expect the Reserve Bank to hold monetary policy tight with the cash rate unlikely to change any time soon.