Australian National Accounts September 2023: In the slow lane

It’s clear the Reserve Bank of Australia’s attempts to steer the economy into the slow lane are working.

In brief

• Australia’s economy grew a modest 0.2 per cent during the September quarter and 2.1 per cent in annual terms, as households were hit with higher mortgage repayments, taxes and inflation.
• Annual growth in consumption saw the lowest growth rate since the pandemic-impacted March quarter of 2021, and the saving ratio fell to its lowest level since 2007.
• Capital investment supported growth, mainly driven by public investment, while net exports detracted from growth, as demand from our major trading partners waned.
• Inflation is now predominantly home-grown with domestic price growth remaining elevated above 5 per cent.

From the Chief Economist

There wasn’t a lot to like in the September quarter National Accounts. Households were impacted by higher mortgage repayments, taxes and inflation, while profits fell for the second successive quarter and weaker global conditions slowed exports. But domestic price growth was at a 30-year high.

These data won’t convince the Reserve Bank that its job is done. But with annual GDP growth at 2.1 per cent – and the per capita equivalent at -0.3 per cent – it’s clear their attempts to steer the economy into the slow lane are working.

There was a small downward movement in unit labour costs as productivity moved a little higher. These will be welcomed by the Reserve Bank, which has emphasised the importance of a reversal of these series to get inflation back to target. But the changes will need to continue to convince the Reserve Bank it can deliver sub-3 per cent inflation target.

Households, which have been at the frontline of the battle against inflation, not only paid 7.6 per cent more in mortgage interest in the September quarter, but also 7.6 per cent more personal income tax. These ‘automatic stabilisers’ have been cooling the economy and working in line with the Reserve Bank’s rate hikes. But contrastingly, other parts of government and public corporations have been adding to aggregate demand in the economy, for example by pushing up investment in transport, communication and utilities projects. Energy price relief and the expansion of the Child Care Subsidy were also props to growth in the September quarter.

Exports, which have been a healthy contributor to growth over the last couple of years, fell 0.7 per cent in volume terms in the September quarter, likely reflecting the fact that many of our trading partners are also slowing down. The prices for some of our major exports, including coal and LNG, were also down in the quarter, meaning the substantial increase in mining profits looks to have come to an end. But after very strong post-pandemic profit growth, this sector is still investing and was partly responsible for lifting private engineering construction.

Inflation, higher interest rates and taxes a drain on domestic consumption

Consumption was unchanged in the September quarter after a near flat result in the June quarter (0.1 per cent). The only reason overall consumption did not record a fall was thanks to the strong influx in temporary residents and tourists. On a per capita basis, consumption fell 0.5 per cent.

Annual growth in consumption has fallen from 11.8 per cent in September last year to 0.4 per cent in September this year, making it the lowest growth rate since the pandemic-impacted March quarter of 2021.

Spending on transport services (up 3.9 per cent) and hotels, cafés and restaurants (up 0.9 per cent) was driven by spending related to the FIFA Women’s World Cup. Australians also traveled overseas (reflected in a 20 per cent rise in travel services imports), renovated homes and took delivery of new cars (up 13.0 per cent) as supply chains continued to ease. Overall, non-essential spending increased 0.7 per cent over the quarter.

State and federal government electricity rebates and the expansion of the Child Care Subsidy Scheme meant households could cut back on essential categories, down 0.5 per cent in the quarter. Spending on electricity and gas fell 16.9 per cent, assisted by a warmer than usual winter. Consumers also cut back on fresh food and alcoholic beverages.

Households continue to struggle with cost-of-living pressures given high inflation, while mortgage repayments and tax payments have also increased considerably. Income tax payable (less social assistance benefits) has risen to a record high of 14.4 per cent of disposable income while interest on dwellings payable has risen to 7.9 per cent of disposable income.

To manage higher expenses, consumers whittled down the amount they are saving. The saving ratio fell from 2.8 per cent in the June quarter to 1.1 per cent, bringing it to the lowest rate since December 2007.

We expect household consumption to remain subdued as the impact of higher interest rates continue to flow through the economy and population growth moderates.

Easing of supply constraints supported construction activity

Dwelling investment lifted by 0.2 per cent in the September quarter, down from a 0.5 per cent rise in the June quarter as supply constraints eased. Renovation activity was the main driver, up 1 per cent this quarter, following seven consecutive quarterly falls. However, this was partially offset by a contraction in new dwelling construction of 0.3 per cent in the quarter.

Dwelling investment is still facing ongoing challenges related to material and skill shortages, especially at the latter stages of construction. In the June quarter, dwelling completions were at the lowest quarterly level in close to a decade, while dwelling approvals are down 18.4 per cent through the year to September. However, dwelling approvals have recovered 4.0 per cent in the September quarter.

Ownership transfer costs increased 2 per cent in the September quarter as higher dwelling prices (up 2.2 per cent in the quarter) and strong population growth increased activity.

Mining and agricultural profits fell while the Women’s World Cup supported the hospitality sector

Company profits fell 1.5 per cent in the September quarter, worsening the 3.7 per cent fall in the June quarter. Results were mixed across industries, with profits increasing in 15 of the 19 industry categories (gross operating surplus and mixed income).

Profits rose the strongest in the accommodation and food services industry (up 10.6 per cent) and the arts and recreation services industry (up 9.7 per cent) as they benefitted from the Women’s World Cup. The agriculture and mining industries recorded the biggest falls, dropping 7.8 per cent and 6.5 per cent, respectively. The fall in mining profits was driven by a fall in coal and LNG prices, although partly offset by rising iron ore prices, and also by a fall in export volumes due to less demand from our key export destinations. However, with mining profits having increased 43 per cent since the beginning of the pandemic, some consolidation in a slowing global economy was inevitable.

The construction industry recorded its fourth successive month of rising profits, meaning its ongoing struggle with a broad range of challenges – including material and skill shortages – is lessening.

Productivity improvement a welcome sign for the Reserve Bank

Hours worked fell by 0.7 per cent as firms reduced hours to adjust to the uncertain economic environment.

This led to an uptick in productivity growth – as measured by GDP per hour worked – which improved by 0.9 per cent through the quarter. Productivity growth was still down 2.1 per cent through the year though, which is a poor outcome. The Reserve Bank will need to see much more evidence of a turnaround before their concerns about the impact of high labour costs are eased. Real unit labour costs, a measure of the average cost of labour per unit of output, increased 1.2 per cent to be 3.9 per cent higher over the year.

Compensation of Employees (COE), which measures the economy-wide wages bill and reflects wages, employment, and job movements, rose 2.6 per cent in the September quarter to be up 8.4 per cent through the year. This was a little lower than the peak reached in the March quarter of 10.5 per cent.

Prices pressures are home grown, not imported

Australia’s terms of trade – the ratio of export to import prices – continued to come off record-high levels seen in 2022, decreasing by 2.6 per cent in the September quarter and down 9 per cent over the year. The change in the terms of trade reflected a fall in export prices (1.4 per cent) and an increase in import prices (1.2 per cent). Export prices for LNG and coal were down due to elevated inventory levels and a weaker outlook for global commodity demand. On the other hand, a weakening Australian dollar and higher oil prices due to supply cuts increased import prices during the quarter.

Despite the change in the quarter, the terms of trade are still elevated compared to the 5-year pre-pandemic average, and the Reserve Bank’s Commodity Price Index indicates commodity prices have recovered 4.5 per cent since September.

International prices continued to fall in the September quarter, down 2 per cent over the year, while domestic price growth remain elevated at 5.3 per cent. As acknowledged by the Reserve Bank, despite inflation being primarily driven by international factors during the pandemic, inflation is now predominantly home-grown.

Public sector activity the key driver of economic growth

Public demand – both consumption and investment – was a major contributor to the growth outcome in the September quarter. Without the public sector, growth would have been flat.

Government consumption rose by 1.1 per cent in the September quarter, up 2.6 per cent through the year. State and federal government social benefits paid to households to address cost of living pressures was a driver, along with a 4.7 per cent rise in defence spending.

Public investment rose by 0.7 per cent through the September quarter, after surging nearly 8 per cent in the previous quarter. This was driven by infrastructure investments by public corporations at all levels of government. In annual terms, public investment continues to rise, up 12.4 per cent over the year – the highest level since 2021, when governments were actively trying to stimulate the economy. Given the nature of public sector infrastructure projects, public sector investment is likely to remain elevated through 2024.

Private investment driven by the mining sector

Private investment increased 1.2 per cent in the September quarter, in line with the previous quarter. Business investment was up a little, rising by 1.5 per cent through the quarter driven by new engineering construction in the mining sector, offsetting a 0.5 per cent fall in machinery and equipment. Over the year, business investment has moderated from over 10 per cent in the June quarter to 7.6 per cent this quarter.

Notwithstanding rising input costs and wages and a subdued economic outlook, private sector investment intentions remained surprisingly robust. Capex intentions for 2023-24 were 8.5 per cent higher compared to the previous estimate for 2023-24 and over 10 per cent higher compared to the same reading last financial year. Given this is in nominal terms, some of this growth likely reflects expected increases in the cost of capital goods and construction.

Net exports detract from growth on weaker demand for mining commodities

Net exports detracted 0.6 ppts from growth, driven by lower exports (down 0.7 per cent) and higher imports (up 2.1 per cent).

Goods exports fell 1.2 per cent through the September quarter, driven by weak demand for our major mining commodity exports. This also helps explains the build-up of mining inventories. The recovery in international students and tourists continued, with service exports rising 1.9 per cent.

Motor vehicles and telecommunications equipment – capital goods – drove a 0.5 per cent increase in goods imports through the quarter. Travel services was the largest driver of the 8.4 per cent rise in service imports as Australians continued travelling overseas.