Australian National Accounts March quarter 2024: Monetary policy will be held tight until the sequins are cleared

The consequence of higher rates is slower growth, and we saw a continuation of this in the March quarter National Accounts today. 

From the Chief Economist

The consequence of higher rates is slower growth, and we saw a continuation of this in the March quarter National Accounts.

Just reading the headline numbers might signal an economy that is slowing enough to take pressure off inflation, yet there were signals in the GDP data that inflation is not where it needs to be, even as the economy flatlined. The measure of household domestic price rises was a very high 4.6 per cent, almost unchanged from the December 2023 quarter.

There was a surge in demand for travel and accommodation around the Grand Prix as well as the Taylor Swift and Pink concerts – creating an unwelcome pressure point and leading to a stronger than expected 0.4 per cent rise in consumption in the March quarter.

Although the Reserve Bank looks through one off events, it doesn’t ignore solid demand indicators. Households saved only 0.9 per cent of their income this quarter, contributing to total savings remaining below 2.0 per cent for a year, the first time this has occurred since the Global Financial Crisis (GFC).

As the year continues, assuming there are no more rate hikes from the RBA, $23 billion of tax cuts and further cost of living measures combined with positive real wages growth means there may even be an uplift in consumption.

Business investment was soft, with a decline in mining project activity in the quarter, while the completion of some state and local government education projects and slower health projects pulled down government investment. But these reflect the lumpy nature of the data and follow recent high levels of public and private investment. Increased demand for data centres showed through in an uplift in investment in machinery and equipment, an early sign of the wave of AI-related spending in the economy. Investment intentions continue to indicate a positive outlook despite rising input costs and wages. It is likely that data needs will continue to rise across the public and private sector, with cyber security a focal point for many organisations.

Strong renewables infrastructure investment is also likely to be driving this outlook, in part fueled by government incentives. Government consumption, which has been strong since the pandemic, was up again in the quarter. Household sector assistance – including health programs through Medicare and the Pharmaceutical Benefits Scheme, as well as energy bill relief payments – explain part of this strength, as does the increased size of the Commonwealth public service.

The ABS also noted increased military exercises over the quarter lifted defence spending, although national security policy changes are also likely to be pushing up this number.

The story of the March quarter is complicated by the strong increase in imports, which pushes the GDP number lower as sales occur offshore. Goods imports – of everything from fertilisers to clothing – led the rise, a sign of improved supply chains and possibly some higher demand. Many of the imports landed in inventories though which has an opposite, positive effect on GDP. The ABS said wholesale and retail businesses accumulated $2.2 billion worth of inventories for sale in the January to March period.

Imports of services fell as Australians swapped their European holidays with closer to home destinations in Asia, especially Japan, where the exchange rate is favorable.

The mining sector has long been a strong source of growth across the economy, but the slowdown in global activity has impacted demand for iron ore, coal and lithium, with the ABS noting mining production outpaced export demand. While exports prices have been very high in recent years, the trend appears to have turned and there was a 1.8 per cent fall in the quarter.

A bright spot has been immigration, which is holding growth above where it otherwise might be. Without strong population growth, the economy would have been shrinking for over a year.

With price indicators high and some ongoing sources of inflation pressure in the households and government sectors in particular, the job of reducing the CPI to the 2-3 per cent target band clearly isn’t done. Until the sequins have been cleared off the floor, we can expect the Reserve Bank to hold monetary policy tight with the cash rate unlikely to change any time soon.

Household spending continues to grow despite cost-of-living pressures

Household consumption rose 0.4 per cent in the March quarter as households continued to allocate their spending towards essential goods and services. The rise in essential spending was driven by spending on energy – due to high summer temperatures – and spending on medical services. Elevated population growth contributed to spending on rent and other dwelling services.

Consumers dedicated spare income for discretionary spending to flights overseas and attending large sporting and music events. This led to increased spending on transport, hotels, cafes and restaurants, and clothing and footwear. Overall, non-essential spending rose 0.3 per cent over the quarter, while essential spending rose 0.5 per cent.

Although cost-of-living pressures persist, income tax payable (less social assistance benefits) fell by 1.5 per cent. Income tax payable remains elevated at just under 12 per cent of disposable income. The fall in income tax payable is expected to continue beyond the June quarter as tax cuts take effect from 1 July. The household saving ratio decreased to 0.9 per cent in the March quarter and remains well below the 5-year pre-COVID average of around 6.5 per cent.

Building and renovating still far from improvement

Contributions to economic growth from house building and renovations remained flat in the March quarter, in a continued trend that took hold in the second quarter of 2021. Dwelling investment fell by 0.5 per cent as did alterations and additions. Ownership transfer costs were also down by 2.2 per cent.

Underlying weakness in construction loans and depressed levels of building approvals will continue to moderate new dwelling investment. This, alongside the increase in population, will continue to put a strain on the housing market and affordability.

Labour productivity continues its slow recovery

Hours worked increased moderately by 0.1 per cent in the March quarter. Coupled with modest economic growth, labour productivity – measured by GDP per hour worked – improved by 0.1 per cent over the quarter.

We prefer to look at this indicator in annual (or multi-year) terms and on that basis, growth remained subdued at just 0.1 per cent over the year. Although positive for the first time since the second quarter of 2022, it still trails the pre-pandemic 20-year average of 1.2 percent, highlighting the need for sustained improvement.

Real unit labour costs – a measure of the inflation-adjusted average cost of labour per unit of output – decreased by 0.7 per cent in the quarter, continuing to ease in annual terms at 3.4 per cent.

Compensation of employees (COE) – a measure of the economy-wide wages bill, reflecting hourly rates of pay, employment and job movements – rose by 1 per cent during the quarter. This was the smallest rise since the September quarter 2021 and was driven by updates to public sector enterprise bargaining agreements. In annual terms, COE grew by just over 7 per cent, with the series remaining elevated but moderating since its peak of 11 per cent in September 2022.

Company profits increased by 2.3 per cent in the March quarter, driven by private non-financial corporations. Big events in the major cities resulted in strong activity in the accommodation and food services industry, offsetting a decline in mining profits due to subdued global demand for iron ore, coal and lithium. In annual terms, profits declined by 0.5 per cent.

Cost-of-living relief sees public consumption continue to increase

Public demand – both consumption and investment – contributed 0.2 percentage points to growth in the March quarter and remains elevated as a percentage of GDP. Government consumption rose by 1.0 per cent in the March quarter due to increased federal government spending on social assistance benefits to households, including health programs through Medicare and the Pharmaceutical Benefits Scheme, and energy bill relief payments by some state governments.

Public investment fell for the second consecutive quarter, down 0.9 per cent in the March quarter, driven by the completion and slowing of health and education projects by state and local governments. In annual terms, public investment moderated to 6.4 per cent, from over 12 per cent in the December quarter. We expect public investment to remain elevated through 2024 given the strong pipeline of public sector infrastructure projects.

Private investment down but investment intentions indicate a positive outlook

Private investment fell by 0.8 per cent in the March quarter, after rising by 0.1 per cent in the previous quarter, with business investment falling by 0.8 per cent through the quarter, driven by a 4.3 per cent fall in non-dwelling building construction focused on the mining sector.

The transformation of the economy continued to show through, with a 2.2 per cent rise in machinery and equipment investment to fit out warehouses and data centres showcasing the increase in online shopping and AI investment. Business investment dropped annually to 3.6 per cent growth this quarter, from over 8.9 per cent in the December quarter.

Investment intentions continue to indicate a positive outlook despite subdued growth and rising input costs and wages, with capex intentions for 2023-24 2.5 per cent higher than the previous estimate for 2023-24. Increases in the cost of capital goods and construction are likely to be a driver as this measure is in nominal terms. The second estimate for investment plans in 2024-25 was $155.4 billion, 12.8 per cent above the same reading for 2023-24, a little lower than the record rise in 2022-23.

Net exports take a hit as inventories build

Overall net exports detracted 0.9 percentage points from quarterly GDP growth, mainly because of a 5.1 per cent rise in imports. Goods exports only rose by 0.7 per cent in the March quarter.

Goods imports rose 6.5 per cent through the quarter. Service imports rose 0.7 per cent in the March quarter, driven by a 10.4 per cent rise in transport. This was partially offset by a 3.5 per cent fall in travel as Australians further reduced their overseas spending.

Meanwhile, goods exports rose 1.1 per cent through the March quarter, driven by stronger overseas demand for our liquified natural gas. Service exports fell by 1.1 per cent, as the arrival of international students remained below average in the March quarter.

A $2.2 billion rise in inventories contributed 0.7 percentage points to GDP growth as wholesale and retail inventories that dipped last quarter were rebuilt with the increase in imports, and mining inventories increased as export demand waned.