Consumers and exports power Aussie economy

• The Australian economy (as measured by gross domestic product or GDP) grew by 0.9 per cent in the June quarter 2022 to be up by 3.6 per cent on the year. ‘Normal’ GDP growth is around 2¼ per cent. GDP per capita rose by 0.5 per cent in the June quarter to be up 2.7 per cent on a year ago.

• In Financial Year 2021/22, GDP grew by 3.9 per cent.

• Farm GDP was up 2.0 per cent in the June quarter and 10.4 per cent on a year ago.

• In nominal terms, the economy grew by 4.3 per cent in the June quarter and was up 12.1 per cent on the year.

• The biggest contribution to the expansion of the economy in the June quarter was by household consumption/spending (+1.1 percentage points, ppt), followed by net trade or exports (+1.0 ppt) and private business investment (+0.1ppt). But inventories (-1.2ppt) and dwelling investment (-0.2ppt) both detracted from growth. And public demand’s contribution was negligible.

• The household savings rate fell from 11.1 per cent in the March quarter to 8.7 per cent in the June quarter.

• In terms of productivity, GDP per hours worked fell 2.0 per cent in the quarter but were up 1.5 per cent on the year. Real unit labour costs fell by 1.1 per cent in the June quarter to be down by 3.8 per cent on the year.
• State final demand in the June quarter: NSW (up 1.9 per cent); Victoria (up 1.0 per cent); Queensland (up 1.0 per cent); South Australia (up 1.5 per cent); Western Australia (up 0.1 per cent); Tasmania (up 0.6 per cent); Northern Territory (down 0.5 per cent); and the ACT (up 0.6 per cent).

What does it all mean?

• • In the June quarter, the Aussie economy shook-off a surge in prices, heavy rains on Australia’s east coast, and increased worker absenteeism due to elevated winter influenza and Covid cases. Labour market conditions strengthened during the quarter with hours worked lifting 2.9 per cent after Omicron virus variant disruptions earlier in the year.
  • And alongside an easing in government Covid restrictions, retail spending, surged to record highs in the quarter. The recovery in services sector activity, 48-year low unemployment and excess pandemic savings combined to power household consumption, boosting overall economic activity and output. Spending on services was particuarly strong, with Hotels, cafes and restaurants (up 8.8 per cent), Transport services (up 37.3 per cent), and Recreation and culture (+3.6 per cent) all contributing to the rise in the June quarter.
  • And while Aussie households were the key driver of economic activity in the June quarter, Australia’s trade sector was another major contributor to GDP growth, thanks to soaring commodity prices and strong export volumes. In fact, the Bureau of Statistics (ABS) reported that “exports recorded the strongest quarterly rise since the Sydney Olympics” in the September quarter 2000.
  • And not to be outdone, farm GDP rose by 2.0 per cent in the quarter to be up by 10.4 per cent on the year. In fact, agriculture, forestry and fishing production lifted 11.0 per cent over the year to June, supported by increased summer crop production for cotton, rice and sorghum, in particular.
  • Business equipment investment made a positive contribution to growth, up 0.6 per cent in the June quarter, as Aussie firms hired more workers who in turn needed plant, equipment and machinery to operate. In fact, equipment spending lifted 3.9 per cent in the quarter, boosted by favourable government tax incentives and strong consumer demand.
  • While contributions to economic growth were broad-based, there were pockets of weakness as higher construction costs, supply chain snarls, rising borrowing costs, fading stimulus and wetter-than-usual weather hampered residential construction activity and investment. In fact, home building activity dipped 2.9 per cent in the June quarter.
  • And a slower inventory build after supply chain disruptions eased also weighed on growth. Retailers and wholesalers may have shed some stockpiles after aggressive re-stocking in previous quarters.
  • And the overall contribution of the government was negligible in the June quarter after a big lift in the March quarter due to a jump in Covid-19 vaccine supplies. While there was a lift in taxation revenue and a rise in royalty income due to stronger commodity prices, government expenses in the quarter remained elevated due to resumption of international arrivals, the Federal Election, the Cost of Living payment and changes to child care support payments.
  • The impact of both price pressures were again evident in today’s accounts. The overall GDP deflator rose by 3.3 per cent in the quarter to be up 8.3 per cent on the year, as the terms of trade jumped 4.6 per cent. The household consumption deflator rose by 1.5 in the quarter and 4.1 per cent on a year ago, the fastest pace since 2001. And the deflator for business investment lifted 1.9 per cent in the quarter and 6.8 per cent on a year ago.
  • In terms of wages, average earnings or compensation per employee rose by 1.4 per cent in the quarter to be up 3.4 per cent on the year. And nominal unit labour costs lifted 1.7 per cent with the annual growth rate easing to 3.0 per cent.
  • The National Accounts publication is the most comprehensive assessment of Australia’s economic performance including economy-wide output and spending. But while Australia’s economic performance remained strong in the first half of 2022, today’s publication largely pre-dates the lagged impact on the real economy of the Reserve Bank’s combined 225 basis points worth of rate hikes since May, the most aggressive policy tightening cycle since 1994.
  • Given that ‘tier-1’ Aussie economic data is largely backward looking, economists are increasingly focusing their attention on higher-frequency ‘tier-2’ releases. August business surveys from both S&P Global and AiGroup show that manufacturing, services and construction activity have all weakened materially, suggesting that high inflation and rate hikes are slowing consumer demand and economic output.
  • And on the consumer side, sentiment surveys are at recessionary levels and the Commonwealth Bank’s (CBA) internal credit and debit card spending data indicates that spending growth is moderating.
  • And already under pressure from skyrocketing energy and food costs, home borrowers are unlikely to feel the full impact of higher mortgage repayments until later in the year. CBA economists estimate that there is on average a three-month lag between an RBA rate hike and when CBA borrowers on variable rate mortgages experience an increase in their home loan repayments.
  • Looking ahead, we expect solid economic growth to continue in the near-term, supported by consumer spending as wages lift and households draw on their savings to offset rising borrowing costs and cost of living pressures. We also expect the balance between goods and services consumption to normalise and for services trade to lift.
  • That said, we expect the economy to eventually lose momentum in 2023, weighed down by the Reserve Bank’s rapid interest rate hikes to slow inflation. Households are expected to slow their rate of spending as the sharp fall in home prices and persistent volatility in financial markets dampen the so-called ‘wealth effect.’ CoreLogic’s measure of national home prices has already declined at the fastest monthly pace since 1983 in August. And while non-mining business investment plans remain positive, China’s economic slowdown and weaker commodity prices could eventually weigh on net exports.
  • CBA Group economists expect calendar year GDP growth to ease from 4.8 per cent in 2021 to around 3.5 per cent in 2022. Growth is expected to step-down even further, easing to around 2.1 per cent in calendar year 2023.     Australia’s economy expanded at a robust pace in the June quarter 2022, underpinned by strong household spending (up 2.2 per cent) and exports (up 5.5 per cent). The economy, as measured by gross domestic product (GDP), grew by 0.9 per cent in the June quarter following the March quarter’s 0.7 per cent expansion. And the pace of annual GDP growth rose from 3.3 per cent to 3.6 per cent in the June quarter, well above the decade average growth rate of 2.3 per cent.

  What do you need to know? 

  • Economic Growth: The Australian economy (as measured by gross domestic product or real GDP) grew by 0.9 per cent in the June quarter 2022 to be up 3.6 per cent on the year. Annual economic growth has averaged 2.3 per cent over the past decade. In Financial Year 2021/22, GDP grew by 3.9 per cent.
  • As at June 2022, the Australian economy was valued at a record $2,296.6 billion.
  • The non-farm economy grew by 0.9 per cent in the June quarter and was up 3.4 per cent over the year.
  • Farm GDP rose by 2.0 per cent in the June quarter to be up by 10.4 per cent over the year.
  • In current prices, GDP rose by 4.3 per cent in the June quarter after expanding 4.1 per cent in the March quarter. Nominal GDP grew by 12.1 per cent on the year (decade average +4.2 per cent).
  • Incomes: Real gross disposable income rose by 2.3 per cent in the quarter to be 5.6 per cent higher over the year. Overall incomes rose by 4.3 per cent in the June quarter. Compensation of employees rose by 2.4 per cent (up 7.0 per cent over the year); non-financial corporate profits rose by 11.2 per cent (up 28.5 per cent over the year); with taxes down by 3.0 per cent (down 0.3 per cent over the year).
  • Real GDP per capita rose by 0.5 per cent in the June quarter and was up 2.7 per cent on the year.
  • Consumer spending: Household spending rose by 2.2 per cent in the June quarter to be up 6.0 per cent for the year. Biggest gains were Transport services (up 37.3 per cent) and Hotels, cafes and restaurants (up 8.8 per cent). But there were declines for the Purchase of vehicles (down 4.3 per cent), Cigarettes and tobacco (down 3.0 per cent) and Food (down 1.2 per cent).
  • Household savings ratio: The household saving ratio fell from 11.1 per cent in the March quarter to 8.7 per cent in the June quarter.
  • Contribution to the overall result: The biggest contribution to the expansion of the economy in the June quarter was by household consumption/spending (+1.1 percentage points, ppt), followed by net trade or exports (+1.0 ppt) and private business investment (+0.1ppt). But inventories (-1.2ppt) and dwelling investment (-0.2ppt) both detracted from growth. And public demand’s contribution was negligible with public consumption (-0.2ppt) and public investment (+0.2ppt) offsetting each other.
  • Inflation: In terms of domestic price pressures, the overall GDP deflator rose by 3.3 per cent in the June quarter to be up 8.3 per cent on a year ago. The household consumption implicit price deflator rose by 1.5 per cent in the June quarter to be up 4.1 per cent on a year ago, the fastest pace since 2001.
  • Wages: Real non-farm unit labour costs fell by 1.2 per cent in the June quarter to be down 3.8 per cent over the year.
  • Productivity and output measures: GDP per hours worked fell by 1.9 per cent in the June quarter after lifting 1.2 per cent in the March quarter. GDP per hours worked was up 1.5 per cent over the year.
  • The terms of trade rose by 4.6 per cent in the June quarter to be up 7.5 per cent on a year ago, hitting record highs.
  • States & Territories: The only data available is state final demand (more accurate data would include net exports but it is not available for all states and territories). State final demand in the June quarter: NSW (up 1.9 per cent); Victoria (up 1.0 per cent); Queensland (up 1.0 per cent); South Australia (up 1.5 per cent); Western Australia (up 0.1 per cent); Tasmania (up 0.6 per cent); Northern Territory (down 0.5 per cent); and the ACT (up 0.6 per cent).
  • On the production side of the national accounts, fifteen of the 19 industry sectors were stronger in the June quarter, led by Accommodation and Food Services (up 10.7 per cent), and Transport, Postal and Warehousing (up 7.5 per cent). But Wholesale Trade (down 2.2 per cent) and Manufacturing (down 1.1 per cent) recorded weaker production in the quarter.

  Originally published by CommSec