Australian Q4 GDP

Growth disappoints, as domestic demand stalls. High inflation and higher interest rates are biting. Q4 domestic demand: 0.0%qtr, 3.3%yr. Q4 real GDP: 0.5%qtr, 2.7% yr.

Read full report 'Australian national accounts Q4' (PDF 187KB)

Economic activity in the Australian economy increased by 0.5% in the December quarter, well below market expectations of 0.8%.

Household spending rose by 0.3%, down from 1.0% in the September quarter. The major contribution to this slowdown was growth in discretionary spending which slowed from 1.9% in the September quarter to 0.4%.

Some stand-outs were transport services, where growth slowed from 12.8% in the September quarter to 5.7% in the December quarter; hotels, cafes and restaurants (5.2% to 1.6%), motor vehicle purchases (10% to 2.9%) and clothing & footwear (3.1% to -2.7%).

The slowdown in spending came despite a sharp fall in the household savings rate, from 7.1% in September to 4.5%. Note that the savings rate was 12.9% in the December quarter 2021. The current level of 4.5% is below our estimate of equilibrium of around 6%, indicating that households are beginning to drawdown part of the $300 billion in excess savings that built up since March 2020. Through 2023 we expect the savings rate will continue to fall as households use this buffer to support spending.

That fall in the savings rate reflected a squeeze in household incomes.

Household incomes came under considerable pressure in the quarter. Although nominal wages grew by a solid 2.1%, payments, including interest and tax, rose by a hefty 8.9% for a contraction of 0.7% in nominal disposable incomes and a fall of 2.2% in overall real disposable incomes. That compared with a fall of -0.2% in the September quarter. These numbers highlight the squeeze being faced by the household sector – despite solid nominal wages growth, households are going backwards largely due to rising interest costs and the surging cost of living.

Consistent with this slowdown in household spending, expenditure on renovations and additions fell by a hefty 4.2%, more than offsetting the 1.4% lift in new dwelling investment which largely reflects the pipeline that built up from the HomeBuilder program and is now winding down.

Business investment was lacklustre, declining by -0.8%, led lower by a fall in construction work and a 0.2% fall in equipment spending.

Overall, domestic final demand was flat in the quarter – down from 0.6% in the September quarter and 2.7% in the first half of 2022.

Net trade contributed 1.1ppts to growth, partly offset by changes in inventories which detracted 0.5ppts.

Domestic price pressures eased somewhat. The domestic demand implicit price deflator lifted by 1.4% (down from 2.0% in September) to be up by 6.6% over the year.

That easing was also replicated in the wage measures. Non-farm compensation per employee lifted by 0.9% in the quarter compared to a rise of 2.2% in September. Alternatively, non-farm compensation per employee per hour was flat in the quarter compared to a lift of 2.2% in September.

The national accounts are depicting an economy where the pressures from rising interest rates and falling real wages are weighing more heavily on household spending than expected at this stage of the cycle. Inflation remains too high but there are signs that despite tight labour markets, wage pressures are easing – exerting even more pressure on the household sector through persistent falls in real wages.

Construction, both non-residential and residential, is weak while businesses, despite record high capacity utilisation and attractive tax incentives, are responding to these demand signals and slowing equipment investment.

The Reserve Bank Board will be mindful of these signals but will remain focussed on its task of ensuring a return to the inflation target zone of 2-3%. That will still require further rate increases in March, April and May.

The Board will not receive another update on the economy through the national accounts until the day after the June Board meeting. We expect that there will be sufficient evidence in line with the signals from today’s accounts to allow it to pause before the rate cuts that we expect from the March quarter in 2024 ensue.

Our current forecast that the Australian economy is likely to stagnate over the second half of 2023 and into 2024 is certainly consistent with the messages from today’s accounts.

Bill Evans, Chief Economist, Westpac Group

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Australian Q4 GDP

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