Australian National Accounts March 2022: Floods and supply disruptions not enough to hold back growth

There is no shortage of demand in Australia’s economy with household consumption, government spending and businesses inventory building all contributing to the 0.8 per cent growth rate in GDP in the quarter. 

The quarterly result has taken the year-ended growth rate to 3.3 per cent, which is a little above average, illustrating the bounce back from the COVID-19 lows. The result would have been stronger still had it not been for supply side constraints, like COVID-19 related staff absenteeism and supply blockages. The floods subtracted some activity but added to defence spending as forces were brought in to help rescue and clean up.

Imports rose sharply too and that detracts from GDP. This was a major reason that net exports were a drag on growth. The rise in inventories and higher imports are related with delays in shipments at the end of last year causing businesses to somewhat overstock in the March quarter, although it is possible others are trying to beat price rises. Purchasing of rapid antigen tests (RAT) were also a reason imports (and possibly inventories) picked up.

Unsurprisingly, the current price measure of GDP grew much stronger than the constant price measure, given inflation across the economy in the quarter. Current price GDP was up 3.7 per cent in the quarter and by 10.2 per cent over the year. 

International price rises have majorly benefitted Australia’s mining sector. The growth in company profits in the quarter was mainly from the mining industry. Mining profits reflected the pickup in Australia’s terms of trade which were 5.9 per cent higher – mainly because export prices were up 9.6 per cent. 

While higher profits firstly accrue to the LNG, coal and iron ore producers that have benefitted from limited supplies from other countries, these businesses are hiring workers and lifting wages (albeit not by much more than other sectors in the economy).

This is also translating to higher taxes and royalties. Taxes less subsidies on production and imports grew by a solid 15.7 per cent in the quarter, reaching pre-pandemic levels for the first time.

These are being transformed into federal and state government benefit payments. There has already been evidence of this with the cash benefits paid to low-income earners and pension recipients in the March Federal Budget and in WA’s recent state budget.

One of the impacts of higher terms of trade is that the profit share of income rises above wages. The share of national income going to profits was a record high of 31.1 per cent in the March quarter. Wages continued a long downward trend as a share of GDP, justifying recent claims for higher pay for minimum wage recipients, especially as real wages have been falling for some time.

There was evidence that the consumer bounded out of COVID-19 with vigour. There were improvements in hospitality and other related service industries driven by eased restrictions and border openings. Household spending especially for discretionary goods and services consumption was up solidly, and households eased back a bit on the proportion of income they are saving. 

Income effects are strong in many areas of the economy

The income side of the national accounts shows that company profits and wages have risen very solidly, providing support for the economy going forward. This is largely a result of high terms of trade feeding through to strong profits, and a tight labour market feeding through to strong wages.

Compensation of employees (a measure of wages and salaries) rose 1.8 per cent during the quarter (up 5.5 per cent during the year) and those wage pressures came largely from the private sector. Tight labour market conditions are finally feeding through to wages pressures – and more quickly than the Wage Price Index (WPI) suggests (up only 2.4 per cent during the year). While the WPI only captures changes within the same position, the National Accounts measure for wages is more comprehensive and captures the whole wage bill (e.g. wage increases due to bonus or job promotions and additional social benefits).

Hours worked fell by 0.9 per cent due to disruptions. At the same time, GDP per hours worked – a measure of productivity – reached the highest level on record. But given hours worked fell due to Omicron-related absenteeism this is not sustainable.

Profits rose 7.3 per cent during the quarter driven by the mining sector. All other industries combined, experienced a decline in profits. Australia’s rising terms of trade, which are a ratio of export to import prices, were up 5.9 per cent in the March quarter and responsible for the mining profit surge. Wholesale trade profits also increased though, driven by increased margins on grains, fuel and motor vehicles. 

Small divergencies only between the states 

Queensland and NSW both recorded positive growth despite severe weather events. Both states benefited from considerable increases in government consumption (up 3.2 per cent and 2.1 per cent, respectively) as a result of flood assistance payments. NSW saw a notable increase in household consumption due to a further easing of restrictions, despite the Omicron outbreak, as did Queensland as borders opened over the Christmas break.

WA’s growth was driven by an increase in government expenditure as the state opened its borders and simultaneously experienced its first bout of Omicron. WA saw relatively tight restrictions in the quarter when compared to other states. As a result, household consumption remained flat, with the hospitality industry taking a hit.

Victoria saw the largest boost with households increasing spending on discretionary goods as restrictions eased further.

The negative result in Tasmania was largely driven by a fall in private health spending and private dwelling investment, in part due to delayed elective surgeries and labour and material shortages. 

The consumer and government remained the bedrock of economic growth

While private consumption spending already bounced back in the December quarter, it strengthened further in the March quarter, increasing 2.7 per cent.

Household spending on goods and services is gradually reverting to normal, although services are still lagging, pointing to consumer hesitancy.

The household saving ratio continues to decline suggesting more willingness on the part of consumers to spend. However, a savings ratio of 11.4 per cent remains historically elevated. More recently, we’ve seen consumer sentiment level fall, suggesting concerns related to COVID-19 may be replaced by cost-of-living pressure and rising interest rates.  

Public demand contributed 0.7 percentage points to growth.

As COVID-19 case numbers rose, healthcare spending increased with a focus on testing (including the shift from PCR to RAT), personal protective equipment and vaccines for children.

While the JobSaver program ceased in the December quarter, Disaster Recovery Payments were provided to individuals and businesses affected by the floods this quarter.

National defence spending saw a strong increase as more than 7,000 personnel from the Defence force were deployed to assist flood affected communities. Further, military and humanitarian assistance was provided to Ukraine.

Public investment rose 1.7 per cent over the quarter, with the largest increase in national defence investment.  

Dwelling investment contracts and rising rates likely to see demand ease

Dwelling investment fell by 1 per cent, once again detracting from growth in the quarter. The contraction was driven by new dwelling investment, which fell 2.2 per cent overall, largely the result of significant labour shortages, input price pressures and supply chain constraints.

The largest fall in new dwelling investment was observed in Queensland, with the floods a key driver of a 9.7 per cent contraction.

Growth in alterations and additions, which remain close to record highs, partially offset the fall in new dwelling investment, with homeowners continuing to boost their property value with renovations. This was particularly the case in Australia’s most expensive property markets - NSW and Victoria - where alterations and additions increased by 6.6 and 5.7 per cent respectively.

Ownership transfer costs – largely a reflection of stamp duty – remain elevated, but in price adjusted terms are starting to fall as transaction volumes decline.

The latest house price data from CoreLogic shows that property prices have probably peaked, with further contractions likely as interest rates continue to rise. The largest market corrections are expected in NSW and Victoria where affordability constraints are biting the hardest.

Historically, falling property prices tends to mean a reduction in construction and building activity, however recent disruption, compounded by strong demand, has seen the time taken to build a new dwelling increase from 8 to 12 months according to the Housing Industry Association. This in turn means there is a significant amount of residential building in the pipeline, yet to be delivered. 

Business investment ticks up, though still underwhelms

Business investment rose by 1.5 per cent over the quarter. This was driven by growth in machinery and equipment, though partially offset by a small contraction in non-dwelling construction.

Importantly, non-mining business investment – an essential ingredient for productivity growth – grew by 2.4 per cent in the quarter to reach a new record level of $44 billion, though as a share of GDP this remains modest. Capex plans suggest the outlook for business investment is better.

Strong fundamentals and delayed shipping last year see imports surge in 2022

Net exports detracted 1.7 percentage points from growth in the quarter, driven largely by a significant uptick in imports, which rose 8.1 per cent. This is a sign of the strength of Australia’s domestic economy as well as a consequence of the policy shift in COVID-19 testing, which resulted in a surge in imports of RATs. Delays in shipping at the end of last year may also have contributed to a rise in this quarter. Imports built up inventories, adding to growth, with stock levels now close to pre-pandemic levels.

Export prices accelerated by 9.6 per cent, the key driver of a significant uptick in Australia’s terms of trade, which rose by 5.9 per cent in the quarter. This will continue to have positive flow-on effects to the rest of the economy.

In volume terms, however, the story is more muted, with exports contracting by 0.9 per cent over the quarter and 4.2 per cent over the year. Again, La Nina and the associated severe weather are a significant disruptor to mining and agricultural activity in the Eastern states. Services exports continue to suffer from low levels of international tourists and students.  

Severe weather impacts agriculture and mining

Fourteen of the 19 industries saw an increase in gross value added – with most industries taking a further step towards normality in the quarter.

Hospitality was the big winner, albeit from a low base. The largest growth was in arts and recreational services, the transport sector and accommodation and food services. However, conditions have not returned to pre-pandemic levels as international tourists are slow to return. Accommodation and food services and the transport sector were still lagging (-9 and -6 per cent below pre-pandemic levels, respectively).

Despite agriculture recording the strongest growth of all sectors since the pandemic, the sector saw the largest decline during the March quarter due to an unusual wet season, including the floods, and the fact that December quarter activity was very strong. Going forward, strong growth is expected, especially on the export side as supply shortages internationally boost Australia’s sales and prices.

A fall in rental, hiring and real estate services during the quarter reflects the real estate market coming off elevated levels. We expect to see further declines as interest rates rise.