Q2 GDP Partials: public demand and foreign students driving growth
The Australian economy is expected to have grown 0.3% in the June quarter 2024, in line with our Q2 GDP preview. However, the underlying drivers differed, with growth in public demand much stronger than expected, offset by a downside surprise in goods exports, while exports of services (mainly foreign students) continues to grow strongly.
The Australian economy is expected to have grown 0.3% in the June quarter 2024. This would see annual growth ease to 1.0% in Q2 – the softest growth momentum since the early 1990s recession. This outcome is well below annual population growth, which is still running around a brisk 2½%.
The domestic demand impulse (spending by consumers, businesses, and governments) is expected to have lifted 0.4% in the June quarter, higher than the 0.2% expected in our preview. The upside surprise was driven by public demand, particularly public consumption which grew by 1.4% in Q2 to be 4.7% higher in annual terms. Public investment also lifted 1.5% in the quarter, after falling 0.8% in the March quarter.
In stark contrast, private demand remains extremely weak. We expect private demand lifted just 0.2% in the June quarter after an increase of just 0.1% in the March quarter. Consumer spending has broadly flat-lined since the December quarter 2022 due to the squeeze on household budgets from bracket creep, higher interest rates and elevated (albeit moderating) inflation.
This is spilling over into the business sector, with business profits and capex falling in Q2. Those industries at the coal face of the consumer-led slowdown have been hit particularly hard.
The more volatile components of GDP – net exports and inventories – are now expected to detract around –0.1ppts from growth in the June quarter, whereas we had previously expected a combined contribution of around +0.1ppts.
The external sector is now expected to contribute around +0.2ppts to growth in the June quarter, on the back of a 5.6% increase in service exports (mainly to foreign students). On the other hand, total inventories (private non-farm and public) are expected to detract 0.3ppts from growth in the June quarter, driven by private non-farm inventories – more details on the outcomes below.
What does this mean for interest rates?
It’s clear that private demand (spending by consumers and businesses) is extremely weak. This will come as no surprise to the RBA who expect growth in GDP to print 0.2%qtr and 0.9%yr in tomorrow’s release.
The key question is how long growth in domestic demand must remain weak to get supply and demand into better balance. Part of the answer rests on the supply side.
Yesterday we saw growth in the private sector wage bill continue to slow. This suggests that the labour market is becoming less tight. At the same time today’s partials, coupled with upward revisions to previous activity we highlighted in our Q2 GDP preview, suggest that the economy may have grown a bit more over the past year than what the RBA had pencilled in back August.
An upward surprise to production without accelerating costs pressures is unambiguously a good thing – it implies that supply is improving and at the very least keeping pace with any growth in demand. While one data print may not be enough to sway the RBA to alter its view on the economy’s supply side capacity going forward, it may suggest that supply has been normalising from the ripple effects of the pandemic more quickly than it had feared.
Public demand
The public sector continued to dominate the domestic demand impulse in the June quarter. Overall, public demand will contribute 0.4ppts to growth in the quarter with the lion’s share of activity stemming from public consumption as government outlays ramp up to fund social benefits (i.e. aged care, the NDIS, childcare, health care and cost-of-living rebates), higher public sector wages and growing government transfer payments (i.e. aged pension, disability & carers pension, family tax benefits and job seeker payments).
Public consumption rose 1.4% in the June quarter to be 4.7% higher through the year. We expect this will make public consumption by-far the most rapidly growing segment of the economy in the June quarter. And, on our forecasts, this will take public consumption to a record share of GDP.
New public fixed capital formation (i.e. public investment) was 1.4% lower in the quarter and down 4.8% in annual terms despite strong infrastructure and investment pipelines across most jurisdictions of government. Total public investment was positive in the quarter, but this was largely driven by purchases of second-hand assets from the private sector which net out when calculating new investment. The slide in new government investment activity was more than offset by an accumulation of public inventories in the quarter which will add 0.2ppts to quarterly growth, offsetting the negative 0.1ppts drag from new public investment.
External Sector
Australia’s current account balance slid further into deficit in the June quarter, printing –$10.7bn, widening from –$6.3bn in the March quarter (revised from –$4.9bn). That was almost spot on with Westpac’s bottom-of-the-range forecast of –$10bn, and well below consensus forecast of –$5.0bn.
The trade surplus (on goods and services) narrowed by a total of $3.9bn over Q2, from $15.9bn to $12.0bn. The chief culprit was a significant narrowing of the goods trade surplus – a consequence of ongoing and significant declines in prices for key commodity exports of iron ore and coal – while a narrowing of the services trade deficit provided only a partial offset. The net income deficit meanwhile widened slightly, from –$21.9bn in March to –$22.5bn in June.
Overall, net exports contributed positively to growth, adding 0.2ppts to Q2 GDP. This is the smallest contribution in absolute terms since March 2023, highlighting just how volatile the external sector has been over the past five quarters
Exploring the volumes side in more detail, export volumes – in aggregate – grew by 0.5% in the June quarter. This is almost entirely thanks to services exports, where volumes expanded by a sizeable 5.6% in the quarter, led by education-related travel services (i.e. foreign students) as the average spend by non-residents increased. Goods export volumes meanwhile fell 0.5% in the quarter, marking a continuation of what has been a disappointing trend in an environment of softening commodity prices, partly reflecting weaker demand but also a lack of capacity expansion in Australia’s key resource export sectors.
Regarding import volumes, services were once again a positive contributor, up 0.5% in Q2. However, this was more than offset by a decline in goods import volumes (–0.4%), which was mostly concentrated in a fall in capital goods imports including machinery and industrial equipment and telecommunications equipment.
Despite the improvement in services export volumes, the goods trade surplus still narrowed significantly due to a significant weakening in commodity export prices. Australia’s export prices, in aggregate, fell –3.0% over the quarter (–3.9% for goods, +0.4% for services). Import prices were meanwhile flat overall (–0.2% for goods, +0.6% for services). This saw the Terms of Trade (ToT) – the ratio of export prices to import prices – fall another leg lower in the June quarter, down 3.1% to be 15.1% lower versus the peak two years ago. It should be noted that the ToT remains elevated versus history however, some 54% above the long-run average dating back to 1959.
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