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The strength of the public sector became very evident in the June quarter as the private sector slumped.
In brief:
- The economy grew by a paltry 0.2 per cent in the June quarter and by 1 per cent over the year, well below its long-term average growth rate.
- Gross Domestic Product (GDP) per capita fell, in real terms, for the sixth quarter in a row – the first time this occurred since the data were collected in 1973.
- Most of the positive momentum came from the public sector, driven by increased payments to the household sector including higher disability benefits and Child Care Subsidy rates.
- Australia’s poor productivity performance continued and employers faced ongoing higher unit labour costs.
From the Chief Economist
Had it not been for the 0.3 percentage point contribution to GDP from government consumption and 0.1 from government investment, GDP would have contracted this quarter.
Spending by foreign students – scheduled to be capped – was one of the few areas of good news in the private sector.
Household consumption (contributing more than half of GDP) was low again, with discretionary consumption falling in real terms and even spending on food falling by 1.0 per cent in the quarter.
Annual consumption growth of just 0.5 per cent was below the Reserve Bank of Australia’s forecast of 1.1 per cent. Saving was also low with households putting away just 0.6 per cent of their income. Had it not been for social benefits to households (which outpaced growth in income tax), household spending and saving would likely have been even lower.
High Commonwealth and state government spending has been a factor driving the national statistics for some time now, and has pushed public spending to a post-war record 27.6 per cent of GDP.
Commonwealth social benefits were up 15.8 per cent in 2023-24 compared to 2022-23, driven by increases in aged care, disability, health, childcare and family and non-government schools. State and local government expenditure also rose with increased employee expenses.
Budget papers show that government spending – across the Commonwealth and states and territories – will be even greater in the future, and further debt will be taken on to pay for it. Net debt across the consolidated general government sector, currently around 30 per cent of GDP, is projected to rise to 34 per cent of GDP by 2026-27. It was 19.3 per cent in 2018-19.
The spending by governments is doing nothing to improve productivity, with GDP per hour worked down 0.8 per cent in the June quarter, and only 0.5 per cent higher over the year. For employers, this is bad news. It also contributed to unit labour costs rising 5.4 per cent over the year.
This is the worst possible combination of statistics, as it means Australian businesses are gaining very little from government spending, which is focused on short-term cost-of-living relief for households and band-aid fixes to neglected problems.
Private business investment fell 1.5 per cent in the quarter, with a 2.4 per cent decrease in machinery and equipment investment. For the private sector, there’s a lack of encouragement to invest for Australia’s long-term prosperity.
The recent super-sized export income gains faded as iron ore and coal prices fell.
While governments spend, and productivity growth remains low, the Reserve Bank needs to keep policy tight. The lack of co-ordination between fiscal and monetary policy means the path to low and stable inflation – and therefore lower interest rates – is rockier than it needs to be.
Explore the National Accounts June 2024 in Ten Charts
Households continue to bear the brunt of high inflation and interest rates
Household consumption fell 0.2 per cent in the June quarter, detracting 0.1 percentage points from growth, as households pulled back on discretionary spending.
The largest contributor to the fall was transport, reflecting a decline in air travel, while households also spent less on hotels, cafes and restaurants as well as groceries. Partly offsetting this was a rise in spending on furnishings and household equipment as consumers took advantage of end-of-financial-year sales. Elevated population growth contributed to spending on rent and other dwelling services.
Overall, non-essential spending fell 1.1 per cent over the quarter, while essential spending rose 0.5 per cent.
Income tax payable (less social assistance benefits) rose by 5.4 per cent in the quarter. Income tax payable remains elevated at 12.6 per cent of disposable income, but this is expected to fall, starting in the September quarter due to the 1 July personal income tax cuts. The household saving ratio remained flat at 0.6 per cent in the quarter and is well below the 10-year pre-COVID average of around 6.6 per cent.
Building and renovating remains weak given interest rate uncertainty
Contributions to economic growth from house building and renovations remained flat in the June quarter. Dwelling investment rose by just 0.1 per cent, thanks to the completion of new dwellings, while alterations and additions fell by 0.8 per cent. Ownership transfer costs were up 3.9 per cent due to greater property sales.
Over the year, dwelling investment fell by 3 per cent.
Building approvals have been increasing since the start of this year and construction loans have started to increase, supporting new dwelling investment. However, building approvals remain below the five-year average which, combined with the increase in population, means demand is outstripping supply, hurting housing affordability.
Annual productivity growth is positive, but needs to be higher to help the Reserve Bank
Hours worked rose by just over 1 per cent in the June quarter, while labour productivity – measured by GDP per hour worked – dropped by 0.8 per cent over the quarter. In annual terms, productivity growth increased to 0.5 per cent over the year, finally moving into positive territory. But sustained improvement is desperately needed given productivity growth still trails the pre-pandemic 20-year average growth rate of 1.2 per cent.
Real unit labour costs – a measure of the inflation-adjusted average cost of labour per unit of output – increased by 1.3 per cent in the quarter, after falling the previous two quarters. However, labour costs continued to ease in annual terms to 2 per cent. Continued improvements in labour productivity would help to offset rising unit labour costs and reduce inflationary pressures.
Compensation of employees (COE) – a measure of the economy-wide wages bill – rose by 0.9 per cent during the quarter. This was the smallest rise since the September quarter 2021 and was mainly driven by the private sector.
COE continues to ease in annual terms, from just over 7 per cent the previous quarter, but remains elevated at 6.3 per cent because of tight labour market conditions.
Company profits decreased by 0.6 per cent in the June quarter. This was mainly driven by the mining sector due to lower global demand and prices for iron ore and coal, and only partially offset by the non-mining sector. In annual terms, profits rose by just over 2 per cent.
Domestic price pressures continue to bubble along
Australia’s terms of trade – the ratio of export to import prices – fell by 3 per cent in the quarter, after falling by 0.7 per cent in the March quarter. This reflects a 3 per cent fall in export prices, while import prices remained flat.
The National Accounts measure of price pressures on the domestic economy moderated slightly but remains elevated. International price growth was broadly flat over the year to the June quarter, while domestic prices growth increased by 4.2 per cent. As with the consumer price index, which is growing by 3.8 per cent, this remains a concern for the Reserve Bank.
Public spending is at a record high
Public demand – both consumption and investment – contributed 0.4 percentage points to growth in the June quarter and is at a record high as a percentage of GDP.
Government consumption rose by 1.4 per cent in the June quarter due to strong growth in both federal, and state and local government spending, which grew by 1.7 per cent and 1.1 per cent respectively. Federal spending reflected higher payments on social benefits programs.
In annual terms, government consumption continues to rise, reaching 4.7 per cent this quarter.
Public investment increased by 1.5 per cent in the June quarter, driven by state and local general government which recorded strong growth of 3 per cent. Public investment fell by 0.5 per cent in annual terms, but remains elevated and indications from pipeline infrastructure data suggest this will remain the case.
Private investment looks to be stagnating but non-mining activity remains at elevated levels
Private sector investment fell 0.6 per cent in the June quarter and detracted 0.1 percentage points from growth.
Investment in machinery and equipment and non-dwelling construction fell by 2.4 per cent and 2.2 per cent respectively. This was partly offset by higher ownership transfer costs, thanks to strong activity in the property market.
Business investment fell for the second consecutive quarter, down 1.5 per cent. Despite this, business investment was 1.6 per cent higher in annual terms, easing from just over 4 per cent in the March quarter.
There were falls in both mining and non-mining investment in the quarter. But non-mining investment as a share of GDP remains elevated, while mining investment has remained relatively flat.
In an environment of subdued growth, forward-looking investment plans remain relatively robust with the third estimate for Capital Expenditure plans in 2024-25 10.3 per cent higher than the second estimate at $170.7 billion. Compared to the same reading in 2023-24, this estimate is 8.2 per cent higher. This is in nominal terms and is impacted by rising prices for capital goods and construction, and competes with strong levels of public sector investment.
Services exports adds to growth
Overall net exports contributed 0.2 percentage points to quarterly GDP growth, reflecting a 0.5 per cent rise in exports and 0.2 per cent fall in imports.
Services exports rose 5.6 per cent through the quarter due to an increase in spending by international students, while goods exports fell by 0.5 per cent.
A $986 million rise in changes in inventories detracted 0.3 percentage points from GDP growth as wholesale and manufacturing inventories decreased following increases last quarter. The fall was partly offset by a rise in public sector inventories.
Summary
The economy grew by 0.2 per cent in the June quarter and by 1 per cent over the year – well below its long-term average growth rate. The strength of the public sector became very evident this quarter. Had it not been for the 0.3 percentage point contribution to GDP from government consumption and 0.1 from government investment, GDP would have contracted.