Australian Q1 GDP

Robust domestic demand early in 2022. Output performance constrained by disruptions. Q1 domestic demand: 1.6%qtr, 4.8% yr. Q1 real GDP: 0.8%qtr, 3.3% yr.

Read full report Australia national accounts Q1 (PDF 163KB)

The Australian economy expanded by 0.8% in the March 2022 quarter for an annual increase of 3.3%.

A key driver of growth was household consumption which increased by 1.5% including a 4.3% lift in discretionary spending as the economy reopened despite disruptions from the Omicron variant and floods. Highlights were: recreation and culture (+4.8%); hotels, cafes, and restaurants (+5.3%); and transport services (+60%). Vehicle purchases also increased by 13% with some easing of supply constraints. Discretionary spending now exceeds the pre-pandemic level for the first time. Essential spending declined by 0.2% due to falls in food (more eating out) and health as Omicron affected visits to doctors and elective surgery.

With household gross disposable income increasing by only 0.6% this solid lift in household spending was partly funded by a further fall in the household savings rate from 13.4% to a still elevated 11.4%. We expect that savings rate to gradually fall back to the equilibrium level of around 6% over the remainder of the year supporting above trend growth in household spending.

The disruptions from Omicron and the floods saw hours worked in the quarter contract by 0.9%, in sharp contrast to a reported 2.6% rise in employment numbers. In short, labour market conditions were quite mixed, with substantial impacts from disruptions.

With total compensation of employees up 1.8%, average earnings per employee contracted by -0.8% although average earnings per hour lifted by a solid 2.7%. In part, this may reflect upward pressures on wages due to ongoing shortages - as suggested by other qualitative indicators. Total compensation of employees in the private sector lifted by a solid 2.3%.

Inflation pressures were evident in the price measures. The domestic final demand implicit price deflator (the best measure of domestic price pressures) rose by 1.4% - the strongest growth since the introduction of the Goods and Services Tax in 2001.

Economic growth in the quarter was severely impacted by the external sector. Exports contracted by 0.9% while imports surged by 8.1% with net exports subtracting 1.7ppt’s from growth. The rebuilding of non-farm business inventories partly reflecting the surge in imports, while other inventories also added to growth (farm and public authorities). Together, total inventories added 1.0ppt to activity in the quarter, providing a partial offset to the hefty net export drag.

Home building contracted for the second quarter in a row falling by 1%. Despite the huge pipeline of work builders have accumulated, largely due to the HomeBuilder program, activity has been disrupted due to labour and material shortages and challenging weather conditions.

Growth in the Australian economy is expected to shift into a higher gear particularly over the next two quarters. Businesses will be encouraged by a buoyant consumer as the economy continues to reopen without the disruptions of the March quarter.

Labour incomes will be boosted by further jobs growth and a lift in wage gains. As we saw in the March quarter, household spending growth can run ahead of disposable incomes when a declining savings rate is releasing greater spending capacity.

We expect these near-term developments to sustain despite soft consumer sentiment, as households worry about inflation, rising interest rates and the global economy. Overall, we expect GDP growth in 2022 to exceed 4% particularly centred around the June and September quarters.

From the Reserve Bank’s point of view, these accounts will reinforce the case for further interest rate rises. The Bank may see some encouraging evidence in the accounts around wages growth but will be more focussed on the clear inflationary pressures now flowing through the economy.

The RBA Board meets next on June 7, and we expect it will take the opportunity to raise the cash rate by 40bps in recognition of the need to fully wind back the emergency rate cuts we saw in 2020. Over the course of the remainder of the year we expect the cash rate to increase to 175 basis points from the current 0.35% on the way to a terminal rate of 2.25% by May next year.

Bill Evans, Chief Economist

Australian Q1 GDP

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