Australian National Accounts December 2024: Economy finds its footing just in time for a challenging 2025

In brief:

• Gross Domestic Product (GDP) increased by 0.6 per cent in the December quarter and 1.3 per cent over the year due to growth in government spending, a recovery in household spending and a pick up in exports.
• Public sector demand reached a new record high as share of GDP.
• Meanwhile private sector investment continued to show signs of weakness, while dwelling investment failed to contribute to growth.

From the Chief Economist

The Australian economy breathed a little easier towards the end of 2024, with slightly happier households, strong government spending and a pick-up in exports. With Gross Domestic Product (GDP) rising to 1.3 per cent in year ended terms – from the woeful 0.8 per cent in the September quarter – there is reason for a little more optimism.

A mild turnaround in household consumption, including discretionary spending, is likely due to real wages growth, personal income tax cuts from mid-2024, government support and the promise of a rate cut (which came through in February). These factors should persist throughout 2025 and maybe even become a little more supportive.

But business investment did little to boost the GDP numbers and for around eight years has been stuck between 11 to 13 per cent of GDP.

The capex intention survey released last week showed a very weak outlook for next financial year, with business saying they would spend only 1.8 per cent more than at the time they made the first estimate of capital expenditure in the 2024-25 year. This could be a decline in construction inflation, but it is also likely to reflect some reduced appetite for investment.

The immediate future is undoubtably uncertain for businesses, and especially exporters, given the trade war which has worsened substantially in recent days with the US, Canada, Mexico and China at the front line. The closely contested Australian election may also cause some hesitation in spending plans as businesses await the outcome.

Disappointingly, labour productivity slipped another 0.1 per cent in the quarter to be 1.2 per cent lower over the year. Real unit labour costs ticked up in annual terms to 2.3 per cent. Domestic prices growth was 3.5 per cent, although international prices offset this strength somewhat. Inflation is not yet as comfortably in the background as the Reserve Bank would like it to be. Today’s numbers suggest the Reserve Bank’s cautious language about further near-term rate cuts is warranted, mainly due to uncertainty about how labour market tightness will play out.

The National Accounts casts a warning about the ongoing swelling in the government sector and how it may play out in an economy that is still somewhat capacity constrained. With government expenses related to the ageing and health care needs of the population, plus defence taking up a larger part of the budget, additional spending will only challenge the economy’s resources and inflation.

The role of Government at this difficult time needs to be focused on lifting the capacity of the economy through productivity enhancements. Some reforms, such as those being developed on competition policy, are doing just that, but there is a need for reform beyond that, including importantly to the tax system. If taxes were collected more efficiently and less were taken from personal and business income, better conditions would be in place to encourage investment.

Public sector spending as a share of the economy sets a new record high

The public sector continued to contribute strongly to the economy, with both public consumption and investment contributing 0.3 percentage points to growth in the December quarter. As a percentage of GDP, public demand continued to rise, reaching a new record high of 28.2 per cent. As we enter the upcoming election period, there is a risk of further fiscal slippage and public demand continues to grow as a share of the economy.

Public investment rose 1.8 per cent in the December quarter – contributing 0.1 percentage points to GDP – with the level of investment the highest on record. The rise in spending was driven by state and territory governments spending on public transport, roads, water and renewable electricity infrastructure. In annual terms, public investment rose by 8.1 per cent.

Government consumption rose 0.7 per cent in the quarter, contributing 0.1 percentage points to GDP. This was mainly due to strong growth in state and territory government spending on health, education and policing – up 0.8 per cent. Public consumption continues to rise in annual terms, increasing from 4.7 per cent in the September quarter to 5.1 per cent. As a share of GDP, it remains elevated at 22.4 per cent, well above the 10 year pre-pandemic average of 18 per cent.

Signs of recovery in household consumption

Household consumption rose by 0.4 per cent in the December quarter, making a 0.2 percentage point contribution to growth. In annual terms, household consumption picked up to 0.7 per cent, but remains far below the pre-pandemic long run average of 2.6 per cent, as household budgets remain under pressure.

The household saving ratio continued to rise for the second consecutive quarter, reaching 3.8 per cent in the December quarter. Although, the amount of disposable income that households can put away for a rainy day remains below its 10 year pre-pandemic average of over 6 per cent.

Essential spending rose by 0.5 per cent, as consumers spent more on rents and health. This continued to be somewhat offset by lower electricity spending thanks to government rebates. Households lifted spending on discretionary items, which rose by 0.4 per cent, thanks to Black Friday sales and music and sporting events. Spending on goods rose by 0.6 per cent in the December quarter, following three consecutive quarters of declines.

Household consumption is expected to recover in 2025, making a more significant contribution to growth. The rise in consumer confidence supports this amidst a still strong jobs market and the prospect of further (although limited) interest rate cuts by the Reserve Bank.

Dwelling investment continues to be hampered by costs and labour pressures

Dwelling investment failed to make a contribution to GDP and fell by 0.4 per cent in December after three consecutive quarters of growth. Price and labour pressures, as well as falling commencements continued to weigh on the pipeline of residential projects. Over the year, dwelling investment strengthened to 2.5 per cent. Alterations and additions fell by 0.9 per cent in the quarter but were 1 per cent higher over the year – the first quarter of growth since Q1 2022. Subdued turnover in the property market led to ownership transfer costs increasing by just 0.2 per cent in the quarter, but moderated from over 7 per cent in the previous quarter to 3.2 per cent over the year.

Upside risks to inflation as productivity growth remains weak and unit labour costs re-accelerate

Hours worked rose by 0.7 per cent in the December quarter, while labour productivity – measured by GDP per hour worked – fell by 0.1 per cent over the quarter. Productivity growth remained in negative territory for the second consecutive quarter in annual terms, down 1.2 per cent. Real unit labour costs increased by 0.6 per cent in the quarter and ticked up in annual terms from 1.8 per cent in September to 2.3 per cent. As productivity growth remains far below its pre-pandemic long run average of 1.2 per cent, a sustained improvement is needed to help offset unit labour costs and eliminate upside risks to inflation.

Labour market conditions remain tight, with the economy-wide wages bill or compensation of employees (COE) rising by 2 per cent in the December quarter and 6.1 per cent over the year – the highest growth rate since Q2 2023. This measure contrasts with the moderating Wage Price Index measure (3.2 per cent over the year to December), because it also reflects growth in the number of employees and hours worked.

Company profits rose in both the quarter (up 1.1 per cent) and on an annual basis (up 0.5 per cent). The mining sector was the main driver due to an increase in prices for iron ore, LNG and gold. Non-mining industries such as Wholesale Trade and Transport also contributed to the rise thanks to stronger demand for grain transport.

Terms of trade increased as domestic price pressures remain

Australia’s terms of trade – the ratio of export to import prices – rose for the first time since December 2023, increasing by 1.7 per cent in the quarter. This reflects a 2.5 per cent rise in export prices due to higher iron ore, gold and LNG prices, which was partially offset by a 0.8 per cent rise in import prices due to a weaker Australian dollar.

The National Accounts measure of price pressures on the domestic economy increased by 0.8 per cent in the December quarter, in line with the last quarter. In annual terms domestic prices remain elevated at 3.5 per cent, reflecting continued increases in labour costs. Elevated growth in rents, airfares and accommodation continued to place upward pressure on price growth.

International prices rose by 0.8 per cent in the December quarter as the Australian dollar depreciated, increasing the price of imports. Though, international prices fell by 0.5 per cent over the year to the December quarter, the sixth consecutive quarter of negative annualised growth.

Underlying inflation fell to 3.2 per cent in the December quarter in annual terms, slightly above target. Price pressures in the Australian economy continue to be driven by domestic factors. The Reserve Bank has expressed greater confidence that the moderation in prices will continue as aggregate demand and supply move closer towards balance, although it remains concerned about the impact of the tight labour market.

Private investment continued to show signs of weakness

Private sector investment contributed 0.1 percentage points to growth, rising by a modest 0.3 per cent in the December quarter. Over the year, private investment continued to moderate from 1.4 per cent in the September quarter to 0.8 per cent.

Business investment was the main driver which rose 0.7 per cent in the December quarter due to a 0.6 per cent rise in non-dwelling construction on mining and renewable energy projects. This was offset by a 0.3 per cent fall in machinery and equipment investment.

Over the year, business investment fell for the first time since 2020, down 0.1 per cent, following a 1.3 per cent rise the previous quarter. As a share of nominal GDP, business investment is relatively flat (at just over 12 per cent of GDP) but still remains above pre-COVID levels – although much lower on a historical basis. Investment continued to be focused in the non-mining sector, which rose by 1.1 per cent in the quarter, while mining investment fell by 0.9 per cent.

The first estimate for capex plans in 2025-26 rose by 1.8 per cent over the year, which based on other initial estimates was weak. This read is in nominal terms, so it could be impacted by easing construction costs, but it could also be an indication that businesses are being cautious on investment plans in the current uncertain environment.

Net trade contributed to growth as services exports grew

Net trade added 0.2 percentage points to growth in the December quarter, reflecting a 0.7 per cent rise in exports, offset by a modest 0.1 per cent rise in imports.

Service exports rose by a solid 3.4 per cent in the December quarter. This reflected a rise in intellectual property services in the pharmaceuticals and computer software sectors as well as an increase in overseas travellers from the United States given the favourable exchange rate. Goods exports increased by a modest 0.1 per cent, reflecting an increase in rural goods as favourable weather conditions led to higher crop production.

Goods imports rose by 1.1 per cent, given increased demand for electric vehicles from households. This was offset by 2.5 per cent fall in service imports, as there was a shift in Australian’s travelling overseas to relatively less expensive destinations closer to home following elevated travel to Europe in the September quarter which coincided with the Olympic Games.

Meanwhile, inventories contributed 0.1 percentage points to growth, mainly driven by a rise in retail trade, as more electric and hybrid vehicles were imported at the end of the quarter, and mining inventories.