Australian National Accounts December 2023: Are we there yet? No, but almost

As the pandemic and its aftermath continues to wash through the economy, we can’t say we are at the end of the slowdown just yet. But, in the absence of any unexpected shocks, almost.

In brief :

• Australian GDP rose 0.2 per cent in the December quarter and by 1.5 per cent since December 2022, in line with expectations.
• High prices, interest rates and taxes continued to zap consumers and discourage home building and renovations. Businesses responded by pulling back orders in anticipation of softer activity.
• But this National Accounts release does not give us reason to be worried. In fact, had GDP growth not been soft Australian households would likely have had to endure further rate pain. Instead, the Reserve Bank has no reason to deviate from it’s current ‘on hold’ position.
• The Australian economy has the conditions in place for a better end to the year.

From the Chief Economist

The weak 0.2 per cent GDP growth rate recorded in the Australian economy in the December quarter was no surprise.

Inflation, interest rates and taxes continued to zap consumers and discourage home building and renovations. Businesses responded by pulling back orders in anticipation of lower demand. Profits in the non-mining sector were lower, and the weather wasn’t as kind to the agricultural sector as earlier in the year.

But had growth not been soft, households would have had to endure another episode of Reserve Bank versus the inflation dragon. The December quarter GDP result of 1.5 per cent growth over the year was exactly in line with the Reserve Bank’s latest forecast – so the central bank will have no reason to deviate from its current ‘on hold’ position following this National Accounts release.

The fact that private business investment growth remained positive while the unemployment rate stayed below 4 per cent in the quarter and inflation moved down, was good news. Capital expenditure data released last week, showed upgraded expectations for business investment in the 2024-25 year.

The Australian Bureau of Statistics (ABS) noted the pickup in renewable energy infrastructure and data centre investment, with firms noting plans for further spending. The mining sector continued to report very positive results, with Australia’s export commodity prices moving higher in the quarter and the Australian dollar exchange rate with the US dollar remaining low and stable through most of the quarter. Mining profits were up 9.2 per cent, with strong international demand – especially for iron ore and coal – being met by higher production and a drawdown of inventories.

Around the country, Western Australia and Queensland were the strongest states (in terms of their domestic activity) with state final demand growing 0.8 per cent and 0.6 per cent respectively. New South Wales state final demand, in contrast, fell 0.4 per cent while Victoria recorded no growth. In both these states, public sector investment was lower, but this has followed very strong activity as major transport projects continue. This activity is likely to continue over the next couple of years; another reason we are optimistic about stronger economic conditions ahead.

Exports of services were up 0.5 per cent in the quarter as incoming travellers and international students continued to arrive in Australia. The ABS noted spending by visitors to Australia is now above pre-pandemic levels. This marks one of the final areas of the economy to recover after the pandemic-induced slowdown.

Governments at both the federal and state level have actively prevented households from feeling the full pain of high inflation by providing financial support with rent, childcare, medicines and electricity in recent quarters. That support has likely helped avoid some damage to the economy, offering households some breathing space as we traverse 2024.

Household disposable income rose slightly as the tax paid by households fell by 3.3 per cent in the quarter. That was the first rise in nominal disposable income in two years and was accompanied by a slightly higher savings to income ratio. While still low by historical standards, at 3.2 per cent, it was the first-time households have been able to lift their saving ratio since mid-2021.

Towards the end of the year, some brighter news is likely as the tax cuts planned for 1 July give back some disposable income to households. Increases in real wages will also help the household sector, and if it is delivered, as currently expected by financial markets, so will an interest rate cut in the December quarter.

The business sector’s ongoing investment augurs well for some ongoing productivity improvements which we have seen nascently begin.

As the pandemic and its aftermath continues to wash through the economy, we can’t say we are at the end of the slowdown just yet. But, in the absence of any unexpected shocks, almost.

Households pull back on non-essential spending as cost-of-living pressures bite

Household consumption remained subdued as the impact of higher interest rates and ongoing cost of living pressures continue to flow through the economy. Consumption rose by 0.1 per cent in the December quarter. This follows a fall of 0.2 per cent in the September quarter. Over the year, consumption has been broadly flat.

Australians spent more on essential goods like food and utilities and less on non-essential goods such as eating out, clothing and cars. Overall, non-essential spending fell 0.9 per cent over the quarter, while essential spending rose 0.7 per cent.

Households continue to struggle with cost-of-living pressures, but income tax payable (less social assistance benefits) was a little less burdensome, falling to just over 12 per cent from a record high last quarter of 14.3 per cent of disposable income. Interest on dwellings payable rose slightly to 7.3 per cent of disposable income, as more mortgage holders rolled off their fixed rate mortgages. Consumers saved slightly more of their income, which was boosted by higher wages and social assistance benefits. The saving ratio increased for the first time in eight quarters to 3.2 per cent. However, it remains below the 5-year pre-COVID average of around 6.5 per cent.

Dwelling investment weak despite population surge

Contributions to economic growth from house building and renovations have been flat or negative since the second quarter of 2021, and this trend continued into the December quarter, with dwelling investment falling by 3.8 per cent.

A fall of 4.2 per cent for alterations and additions is the largest quarterly drop since the start of the pandemic, and a clear sign that households are continuing to struggle with cost-of-living pressures.

Approvals for houses and apartments are hovering close to levels not seen since 2012. At the same time, the number of new owner occupier loan commitments for the construction of new dwellings fell by 6.3 per cent in the year to December. Underlying weakness in terms of approvals and owner occupier construction finance will continue to moderate new dwelling investment. This, alongside the increase in population, will continue to put a strain on the housing market and affordability.

The number of new investor loan commitments for the construction of new dwellings are elevated, with investors wanting to capitalise on low vacancy rates and strong population growth. However, constraints in the construction sector will moderate any upswing, with longer build times and labour supply shortages still prevalent.

Productivity has begun its post-pandemic recovery

Labour productivity growth – as measured by GDP per hour worked – improved by 0.5 per cent in the quarter. This was driven by a fall in hours worked as labour market conditions continued to ease. The turnaround is welcome, but continued improvements are needed before a positive trend can be certain.

Real unit labour costs – a measure of the average cost of labour per unit of output – increased by 0.1 per cent in the December quarter, to be 3.7 per cent higher over the year.

Compensation of employees (COE) – a measure of the economy-wide wages bill, reflecting hourly rates of pay, employment and job movements – rose by 1.4 per cent during the quarter after increasing by 2.8 per cent in the previous quarter. In annual terms, COE has moderated but remains elevated, increasing by 8.4 per cent. This is much higher than the Wage Price Index (WPI), which increased by 4.2 per cent over the year, but uses a narrower definition of wage increases.

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.