Australian national accounts, June quarter

Subdued growth, consumer spending broadly flat. Households under pressure from high inflation, additional tax obligations and higher interest rates. Domestic demand, 0.7%qtr, 2.2%yr. Real GDP, 0.4%qtr, 2.1% yr

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The Australian economy expanded by 0.4% in the June quarter following a 0.4% increase in the March quarter (revised up from 0.2%).

Key themes from the accounts are: ongoing weakness in consumer spending; slowing growth in employee compensation; rapid deterioration in productivity; and boosts from business investment and services exports.

Growth in household spending slowed to 0.1% in the quarter, down from 0.3% in the previous two quarters and the slowest growth in spending (excluding the pandemic quarters) since September 2019.

Discretionary consumer spending (–0.5%) contracted for the third consecutive quarter highlighted by recreation (–2.5%) and furnishings and household equipment (–2.5%). Other discretionary spending (transport; hotels; restaurants) continued to increase but at a much more subdued pace than in previous quarters. Essential spending lifted by 0.5%.

Compensation of employees continued to rise (1.6%), down from 2.4% in March and the lowest growth rate since September 2021 (a period impacted by delta). The sharp increase in compensation is starting to fade with the June quarter pace only slightly above the average pace (1.3%) in 2019, prior to the pandemic.

Slower growth in employee compensation at a time of the savings rate reaching historical lows signals further pressure on household spending. The household savings rate fell from 3.6% to 3.2% – the lowest savings rate since June 2008 and down from 12.9% in December 2021.

Strong growth in employee compensation and a falling savings rate have been key to supporting household spending when an excessive tax burden; higher interest costs and a rising cost of living have challenged household spending.

Prospects for a recovery in household spending under these circumstances are not encouraging.

GDP per hour worked fell 2.0% in the June quarter to be down by 3.6% over the year. Real unit labour costs lifted by 3.2% to be up by 5.8% over the year. While these measures are volatile the accounts continue to highlight the nation’s productivity challenge.

Business investment and services exports were bright spots. New private business investment lifted by 2.1%, highlighted by new machinery and investment which rose by 4.3%, boosted by attractive tax concessions, in particular investment in motor vehicles. New public investment surged by 5.2%, reflecting ongoing work on large scale transport, health, and education projects.

Exports of goods and services rose by 4.3%, highlighted by services exports rising by 12.1%, from education and travel – with international students and Chinese tourists being strong contributors.

The terms of trade pulled back, down by 7.9% in the quarter, representing a hit to national income. The terms of trade are now 12.7% below the record high of a year earlier but still 53% above the long-run average.

Prospects for growth in the Australian economy hinge on the household sector. A rock bottom savings rate; slowing growth in employee compensation; low confidence and no prospect of any interest rate; tax; or cost of living relief point to the economy continuing to grow well below trend.

As we saw in these national accounts and the March quarter, GDP per capita is contracting – by 0.3% in both quarters. Prospects for that changing over the next year or so are not encouraging.

Under these circumstances the Reserve Bank is likely to keep rates on hold at the current contractionary level until well into 2024. Some relief is likely in the second half of 2024 when rates can be eased, and the important Stage 3 income tax cuts are scheduled to be delivered.

Bill Evans, Chief Economist, Westpac Group

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Australian national accounts, June quarter

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