Australian Q2 GDP

Consumer spending leads the way, on reopening effect. Hospitality and travel spending up strongly. Q2 domestic demand: 1.1%qtr, 4.7% yr. Q2 real GDP: 0.9%qtr, 3.6% yr.

Read full report 'Australian national accounts Q2' (PDF 186KB)

The Australian economy expanded by 0.9% in the June quarter following an increase of 0.7% in the March quarter, meeting market expectations. Annual growth in the year to the June quarter was 3.6%.

The key driver of domestic demand was household consumption which lifted by 2.2% driven by spending on services which increased by 3.6%; in contrast, spending on goods decreased by 0.1% (including a 1.2% fall in purchases of food from supermarkets and specialty stores). The reopening effect was clearly the dominant factor with hotels, cafes, and restaurants (+8.8%); transport services (+37.3%); and recreation and culture (+3.6%) all booming.

Nominal growth in compensation of employees lifted by 2.4% with private sector compensation up by 3.1%, while nominal gross disposable income increased by 1.0% - the same pace as in the March quarter.

The surge in household spending was not only supported by that strong growth in compensation but there was also a significant fall in the household savings ratio which freed up additional funds for spending.

The household saving ratio fell from 11.1% to 8.7%, having now fallen from 19.8% in September 2021 in the wake of the delta lockdowns. This fall brings the household savings ratio close to the equilibrium ratio of around 6%. A major issue for the growth outlook is whether the ratio falls significantly below that equilibrium 6% as households draw on those “excess” savings (around $275 billion) that have been accumulated during the two and a half years of the pandemic.

Of note, the transport and accommodation sectors contributed 0.5ppts of the overall 0.9ppt growth in the production measure of GDP.

Home building contracted by 2.9% and non-residential construction contracted by 5.0%, reflecting unfavourable weather and labour and material shortages.

On the other hand, machinery and equipment investment lifted by a very solid 3.9% as business confidence remained buoyant in the June quarter.

Following the unprecedented build-up of $7.8bn in total inventories in March, there was a modest $1.6bn build-up in the June quarter, subtracting 1.2ppts from GDP growth.

Export volumes surged by 5.5% in the quarter boosting the trade surplus to 7.1% of GDP – the largest trade surplus in the history of the national accounts.

Consumer prices (as measured by the CPI) increased by 1.8%, for an annual increase of 6.1% - the fastest annual increase since June 2001.

There is no real evidence in these accounts of the impact of the RBA’s rate increases which began in the first week of May (0.25%) and June (0.5%), since it takes time for the banks to pass on those increases. Indeed, business and household spending were strong in the June quarter while household spending growth for the March quarter was revised up from 1.5% to 2.2%.

The Reserve Bank’s objective is to slow demand growth to a point where inflationary expectations, which are currently rising quickly, are wrung out of the system. The channels for flattening growth in demand will include a very large negative wealth effect as house prices tumble; restricted growth in household disposable income as interest rates increase; record low Consumer Confidence; and increased borrowing costs for business.

We think that objective will be achieved by steadily increasing the cash rate to 3.35% by early 2023 with GDP growth eventually slowing to around 1% in 2023, including growth in household spending of just 1.2% compared to 6% in the year just passed.

As we see in the June accounts, one area of uncertainty is to what degree households use their accumulated savings to offset the rate increases by driving the savings rate well below equilibrium; how quickly the reopening boost to discretionary services fades; the longevity of the saturation effect on household goods consumption; whether business confidence remains resilient to the rate increases; the performance of a construction sector that has been disrupted by weather and supply shortages.

Unfortunately, if household spending in particular does prove resilient it is likely that the RBA will extend its tightening cycle further into 2023.

Bill Evans, Chief Economist

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Australian Q2 GDP

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