Q3 GDP Partials: Christmas comes early in Canberra
The Australian economy is expected to have grown 0.6% in the September quarter 2024, a touch above the 0.5%qtr expected in our Q3 GDP preview. Even though we were bullish on new public demand, today’s partials came in stronger. The contribution made by net exports and inventories were exactly as expected in our Q3 GDP preview.
The Australian economy is expected to have grown 0.6% in the September quarter 2024. This would see annual growth come in at 1.2% in Q3. However, significant upward revisions to construction activity and public spending could add around 0.2ppts to year-ended growth.
The domestic demand impulse (spending by consumers, businesses, and governments) is expected to have lifted a solid 0.9% in the September quarter, marginally higher than the 0.8% expected in our preview. Even though we were bullish on new public demand, forecasting a 1.9%qtr increase in Q3, today’s partials came in stronger at 2.1%qtr.
New public investment grew 5.3% in Q3 – the strongest growth rate since the September quarter 2018, while public consumption lifted 1.4% in the quarter, to be up 4.6%yr. New public demand is expected to contribute around 0.6ppts to GDP growth in Q3, the largest contribution since 2012 outside of a few quarters during the pandemic.
As a result, new public demand will climb to 27.8% of GDP in Q3 – a new record high. This quarter was not only about spending. Governments also borrowed big to pay for this additional spend, with net public borrowing a whopping $40bn in Q3, the largest quarterly borrowing amount since the lockdowns in 2021. This equates to around $1.7k in borrowing for each member of the working age population.
Part of this spending and borrowing was used to pick up the tab for the electricity rebates and other cost-of-living measures. We estimate that these subsidies in essence boosted household consumption by 0.4ppts in the quarter, but will show up in public spending.
We were spot on when it comes to the more volatile components of GDP. Net exports and inventories are still expected to detract around –0.3ppts from growth in the September quarter, consistent with our preview (see here).
The external sector is now expected to contribute around +0.1ppts to growth in the September quarter, on the back of solid growth in goods exports and a fall in goods imports, which was partly offset by a –0.1ppt detraction in the net services balance. Total inventories (private non-farm and public) are expected to detract –0.4ppts from growth in the quarter, driven by private non-farm inventories.
Public demand
The rapid expansion in new public demand continued in the September quarter, underpinned by a spike in investment activity and persistent momentum in public consumption. New public demand will add 0.6ppts to GDP growth in the September quarter, the largest contribution since 2012 outside of a few quarters during the pandemic.
Some constraints on construction activity appear be gradually loosening, supporting new investment activity which spiked 5.3% in the quarter, trimming the annual fall to 1.0%. The pipeline for public investment remains significant and will continue to support investment activity.
A raft of state and federal government cost-of-living measures, rising public sector wages and the expansion of the care economy are undergirding persistent growth in public consumption which rose 1.4% for a second consecutive quarter and is up 4.7% over the year to the September quarter.
The quarterly public impulse was made even more significant by significant upward revisions to the level of public spending over the prior year. In total, the upward revisions total nearly $34bn or around a 5 percent upgrade to annual spending over the 2023-24 financial year.
The continued strength in public spending will see the public sector become an even bigger slice of the economic pie, rising to an expected 27.8% share of GDP in the September quarter – a fresh record high.
Government borrowing
Like all things, there’s no free lunch when it comes to government spending. It must be funded somehow and with softer commodity prices, slowing migration and the implementation of stage 3 income tax cuts, revenues didn’t cut the mustard in Q3, leaving the credit card to do the heavy lifting.
Government borrowing almost tripled to just shy of $40bn in the September quarter, the largest quarterly increase in government borrowing since the September quarter of 2021 when the budget was stretched by lockdown restrictions across large parts of the country. Around $18bn of this shortfall came from state and local governments, $14bn from the federal government and the balance accounted for by public corporations.
The quarterly increase in borrowing equates to around $1.7k for each member of the working age population.
External Sector
Australia’s current account balance improved in the September quarter, with the deficit shrinking by more than $2bn to $14.1bn. That said, revised current account estimates for June and prior quarters meant the starting point was significantly weaker with the new value of –$16.4bn for the June quarter represented the biggest current account deficit in eight years.
Among the key components, trade surplus declined to just $3.3bn, falling from the post-pandemic peak of more than $40bn reported in the June quarter of 2022. The drop in goods exports (–2.3%qtr), accounted for by falling exports prices, was an important driver, but goods imports were down too (–2.2%qtr).
Meanwhile, services trade also provided a negative contribution, with the balance deteriorating to –$11.8bn, the lowest level on record. The combination of European summer and ‘Olympics fever’ was the chief driver here, resulting in a large uptick in outbound tourism from Australians.
There were also significant revisions in this segment that were almost entirely the result of new estimates for the ‘digital services’ sub-category, including streaming services, advertising services and computer software. Over the year to Q2 2024, the trade deficit in this segment was revised up a whopping $16.6bn. These updates were incorporated into the annual national accounts released in October, so its impact on other expenditure estimates in the upcoming quarterly national accounts are already known.
The primary income deficit – another important component of the current account – surprisingly narrowed by a total of –$5.5bn over the quarter, now recording the smallest deficit in three years. This was largely driven by a decline in outflows, centred on dividends paid to overseas investors, in addition to lower interest payments on debt.
Today’s figures also confirmed that in real terms net trade will have provided a 0.1ppt contribution to GDP growth in the September quarter, bang in line with our expectations. This is the second consecutive quarter of positive, albeit marginal, support from the external sector to the economic growth after subtracting 1.3ppts at the start of the year.
Exploring the volume side in more detail, total exports were up just 0.2%qtr, with goods outflows rising 0.9%qtr and services offsetting the increase with the drop of 3.6%qtr following a 5.1% rise in the June quarter. Interestingly, services exports declined despite a notably higher volume of personal travel including education-related travel (foreign students). This was offset by a decrease in the business travel category.
On the imports side, goods and services categories showed opposite changes: goods imports declined 1.5%qtr, as a rise in imports of capital goods by 1.7%qtr was more than fully offset by decreases in consumption and intermediate goods inflows by 4.2%qtr and 1.7%qtr respectively. Meanwhile, strong business and personal travel pushed services imports higher by 3%qtr.
The difference in the picture for nominal and real trade is explained by significant changes in export and import prices. In the September quarter, the export deflator was down 2.6%qtr and almost 5%yr, while the import price measure was almost unchanged from the June quarter and down only 1% on the annual basis. This means that Terms of Trade (ToT) – the ratio of export to import prices – declined once again, by 2.5%qtr and 4.0%yr. While the ToT is at its lowest level since early 2021, it nonetheless remains well above pre-pandemic levels and historical averages.
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