Australian national accounts, December quarter

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The Australian economy posted a weak finish to 2023, expanding by just 0.2% in the final quarter and annual growth moderating to 1.5%yr. The economy tracked a 1% annual growth pace through the second half of last year. Outside of the extremes seen during COVID, this is the weakest six month performance since the GFC hit fifteen years ago. Domestic final demand was essentially flat in the final quarter, the detail showing the weakness evident across the consumer sector since mid-2022 is starting to spread to other cyclically sensitive areas.

While both results and much of the remaining detail was in line with our expectations, the report underscores the extent to which policy tightening and cost of living pressures are weighing on demand and activity. The private-public split is also notable: private demand essentially flat over the second half of 2023 with almost all of the gains overall coming from increased public demand.

Private consumption again came in about flat, rising just 0.1%qtr and having now barely grown for five successive quarters. Per capita spending has fallen 2.8% since the September quarter of 2022. The mix showed further declines in discretionary spending categories with gains confined to basics like food, health and fuel. 

The picture on household incomes was a little brighter, public sector wage gains and some easing in income tax payments from recent highs driving a 1.5%qtr rise in real household disposable incomes (i.e. after interest and tax). While that marks the best quarterly gain in two years, real disposable income is still 3.4% below its December 2021 level. Moreover, most of the improvement has flowed to saving rather than spending, the household saving rate lifting from 1.9% to 3.2%. Even with that lift, ‘new’ saving is relatively low, implying that consumers are still drawing on the additional saving reserves accumulated during the pandemic to support spending. 

Private investment is starting to show clearer signs of weakening, particularly in areas known to be more sensitive to cyclical swings. Dwelling investment declined 3.8%qtr, the move lower following five flat quarters. Business investment is also showing a further loss of momentum, the 0.7%qtr rise in the December quarter following a similar pace in September, having averaged 2.4%qtr over the previous two years. Notably, machinery and equipment investment, which tends to be more cyclical, recorded an outright decline of 1.3%qtr. Activity in the infrastructure and non-residential building space continues to be supported by a large pipeline of work, both recording gains in the quarter.

Around productivity, the accounts again show a modest improvement with a 0.5% gain in the December quarter as weak output growth combined with a 0.3% decline in hours worked. While GDP per hour worked is still down 0.5%yr, it has improved markedly from the dismal –5.2%yr read at the start of 2023. Unit labour costs rose 1.3%qtr, lifting the annual pace to 6.6%yr. While that is still a somewhat troubling pace for domestic cost pressures to be rising at, we are still experiencing significant volatility around productivity and unit labour cost measures, making underlying trends difficult to discern.

Looking ahead, the economy is expected to see continued weakness near-term with a policy ‘pivot’ providing more support from the middle of the year. 

An improving inflation situation should allow the RBA to begin moving interest rates lower from September. 

On the fiscal side, the Stage 3 tax cuts will come in from July and other support measures are likely to be announced with the May Budget. The more general easing in cost-of-living pressures will also improve conditions for households.

However, working against these forces will be slowing population growth, a softer labour market and diminished pandemic savings reserves, which will tend to restrain the upturn.

Matthew Hassan, Senior Economist, Westpac Group

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