Australian National Accounts September 2024: Government supports GDP but falls short on long term business needs

September quarter reveals record levels of government spending is underwriting the Australian economy

In brief:

• Gross Domestic Product (GDP) increased just 0.3 per cent in the September quarter and 0.8 per cent over the year due to surprising weakness in the private sector.
• Public sector growth was strong, rising to a new record high as a share of GDP, at 28 per cent.
• Household incomes improved due to Stage 3 personal income tax cuts, but household spending remained weak.
  

From the Chief Economist

The September quarter National Accounts clearly reveal that the public sector is underwriting the Australian economy.

Never before have governments pumped so much into the economy via rebates, tax cuts, infrastructure, health and disability support and defence.

Government spending and investment climbed to a record high share, at 28 per cent of GDP in the September quarter.

Yet the economy managed just 0.3 per cent growth in the quarter and 0.8 per cent growth over the year.

Federal and state governments continue to spend big. It’s hard to find a government in Australia that doesn’t have a record high capital program over the next four years. This is largely thanks to a legacy of infrastructure investment to support population growth and the economy through the pandemic.

Cost-of-living problems prompted a new round of temporary – but substantial – transfers to households from governments, with federal and state electricity rebates being the most prominent. These lowered household spending relative to what it would have otherwise been, but when excluding electricity gas and other fuel, household consumption would have only grown 0.5 per cent growth over the year.

This is particularly disappointing given the Stage 3 tax cuts lowered the tax paid by households by 3.8 per cent, helping to lift disposable incomes by 1.5 per cent. Households were, however, able to save a little more, with the saving ratio up slightly.

Ongoing spending pressures on governments continue, with an ageing population; strong demand for services; defence needs in a geopolitically uncertain world; and the energy transition.

But, as we have consistently argued, this level of spending won’t deliver macroeconomic stability and drive sustainable long-term growth.

Productivity growth and the terms of trade are falling, consumer prices are still rising too strongly, and interest rates remain high.

There is a trade-off - in a capacity constrained economy - between monetary policy and fiscal policy. Interest rates won’t be eased while the Reserve Bank is concerned that inflation is above its 2-3 per cent target band within a reasonable time. Government spending is, in some areas, adding to inflation because it is causing the prices for goods and services to be bid up.

Further, additional government spending needs to be funded by debt, so temporary ‘fill-ups’ for the economy have an ongoing interest cost too. In the year to September, the interest rate bill across all levels of government was almost $43 billion. That reduces options for governments in the future.

Private business investment is at a decent level helped by additional equipment and software investment, particularly reflecting the need for business to spend on technology and renewables. But non-residential construction and resource exploration investment fell in the quarter. There is also a new wave of uncertainty approaching from President-elect Trump. Coupled with rising regulation, fewer migrants and a government unwilling to kickstart needed reforms on tax, an investment freeze is within sight.

The September National Accounts paint a picture of a sad economy without much hope. The private sector needs more from their governments than short-term fixes to today’s problems. While policies like the $900 million productivity incentives fund and the National Competition Policy initiative are welcome, a focused agenda that drives GDP growth from the private sector is crucial – now more than ever.

Household consumption remains in the doldrums, failing to contribute to growth

Household consumption remained weak and was flat compared to the previous quarter (although part of the weakness was because their spending on electricity was subsidised by government). In annual terms consumption grew just 0.4 per cent. Despite the fall in income tax payable and short-term energy bill relief, many households continue to struggle due to elevated prices and high interest rates.

Spending on essentials fell 0.1 per cent as lower electricity spending was slightly offset by higher spending on other essentials like rents, education and health services. Discretionary spending rose slightly (up 0.1 per cent) led by clothing and footwear. Interestingly though, many Australians continued to spend on overseas trips.

The household saving ratio remained well below the 10-year pre-COVID average of over 6 per cent, reaching 3.2 per cent in the September quarter, up a little from 2.4 per cent in the June quarter. This is the highest since the last quarter of 2022.

The Reserve Bank expects a recovery in household consumption to support economic growth moving forward. In what might be a positive sign, ANZ-Roy Morgan consumer confidence recently rose to its highest level since May 2022.

Builders continued to work through construction bottlenecks

Dwelling investment rose for a third consecutive quarter, up 1.2 per cent in September, but down 0.5 per cent over the year – as new dwellings that were previously delayed ticked over to complete. But constraints in the building industry remain. While alterations and additions rose by 0.4 per cent in the quarter, continued turnover in the property market led to ownership transfer costs increasing by 1.6 per cent in the quarter, and nearly 8 per cent over the year.

It was a tale of the east/west coast divide, as the Western Australian housing market experienced strong growth in new dwelling investment and alterations and additions – up 5.4 per cent over the year to the September quarter – compared to a 1 per cent fall for the rest of the country.

Productivity growth slipped back into negative territory

Hours worked rose by 0.8 per cent in the September quarter, while labour productivity – measured by GDP per hour worked – fell by 0.5 per cent over the quarter. In annual terms, productivity growth decreased by 0.8 per cent, slipping back into negative territory. Productivity growth has been well below the pre-pandemic 20-year average growth rate of 1.2 per cent for the last two and a half years. A sustained improvement is desperately needed.

Real unit labour costs – a measure of the inflation-adjusted average cost of labour, per unit of output – increased by 0.5 per cent in the quarter However, labour costs continued to ease in annual terms to 1.6 per cent. The Reserve Bank is hoping for continued improvements in labour productivity to help offset rising unit labour costs and reduce inflationary pressures.

Compensation of employees (COE) – a measure of the economy-wide wages bill – rose by 1.4 per cent during the quarter. The public sector saw strong growth of 2 per cent due to the larger workforce and wage rises, while the private sector measure increased by 1.2 per cent.

COE continues to ease in annual terms, from 6.4 per cent the previous quarter, but remains elevated at 5.4 per cent because of tight labour market conditions.

Company profits decreased by 1.5 per cent in the September quarter. This was mainly driven by the mining sector, which recorded a third consecutive quarterly fall in profits due to lower prices for coal and iron ore as a result of reduced global demand. In annual terms, profits rose by just over 0.8 per cent.

Terms of trade fell for the third consecutive quarter

Australia’s terms of trade – the ratio of export to import prices – fell for the third consecutive quarter, decreasing by 2.5 per cent. This reflects a 2.6 per cent fall in export prices due to lower metallurgical coal and iron ore prices, while import prices also fell due to lower oil prices.

The National Accounts measure of price pressures on the domestic economy moderated to 0.7 per cent in the September quarter, the lowest increase since March 2021. In annual terms domestic prices remain elevated at 3.6 per cent, as labour shortages and high construction costs continue to place upward pressure on price growth.

International prices fell by 1.0 per cent over the year to the September quarter. The Reserve Bank remains concerned about price pressures in the economy, with the underlying inflation coming in above target at 3.5 per cent in the year to the September quarter.

Public sector continued to reach record highs as a share of the economy

The public sector continued to contribute strongly to the economy, with both public consumption and investment contributing a significant 0.6 percentage points to growth in the September quarter. As a percentage of GDP, public demand continued to rise, reaching a record high of 28 per cent.

This was also reflected in the rising employment share of the public sector to a record high of nearly 18 per cent of total employment in the Australian economy.

Public investment surged 6.3 per cent in the September quarter – contributing 0.3 percentage points to GDP – with the level of investment the highest on record.

Governments spent big on defence equipment, hospitals, roads and renewable energy. In annual terms, public investment rose by 2.3 per cent, after declining by 0.6 per cent the previous quarter.

Government consumption rose 1.4 per cent in the quarter, contributing 0.3 percentage points to GDP. This was mainly due to strong growth in state and local government spending on state-based energy bill relief – up 2.2 per cent. Public consumption continues to rise in annual terms, edging up to 4.7 per cent from 4.5 per cent in the June quarter.

Private investment growth was weak as mining investment fell

Private sector investment increased by just 0.1 per cent in the September quarter. In annual terms, growth increased by 1.3 per cent.
Non-dwelling construction fell by 2.7 per cent in the quarter driven by a reduction in new building and engineering construction, following recent strength due to investment in warehouses and data centres.

Business investment fell by 0.6 per cent in the September quarter and was 1.3 per cent higher in annual terms, easing from 2.6 per cent in June. Mining investment fell by 2.3 per cent in the quarter, while non-mining investment was flat. As a share of nominal GDP, non-mining investment remained elevated while mining investment remained relatively flat.

In an environment of subdued growth, forward-looking investment plans remain relatively robust with the fourth estimate for Capital Expenditure in 2024-25 5.1 per cent higher than the third estimate at $178.2 billion.

Compared to the same reading in 2023-24, this estimate is 4.3 per cent higher. But this needs to be read with some caution as it is in nominal terms, and is impacted by rising prices for capital goods and construction.

Falling inventories offset a small net trade contribution

Net trade added 0.1 percentage points to growth in the September quarter, reflecting a modest 0.2 per cent rise in exports and 0.3 per cent fall in imports.

Service exports tumbled 3.6 per cent in the September quarter mainly due to the fall in the number of international students arriving, while stronger demand from Asia for Australian coal led to a 0.9 per cent rise in goods exports.

Service imports rose by a solid 3 per cent, as some Australians travelled overseas including for the European summer and Olympics. This was offset by a 1.5 per cent fall in goods imports, given weaker demand for electric vehicles from households.

Meanwhile, a $712 million fall in changes in inventories detracted 0.4 percentage points from growth, mainly driven by a fall in mining inventories, as production was impacted by shutdowns and maintenance, as well as retail trade.