Australian National Accounts June 2023: Finding a new equilibrium

Rising interest rates and the ongoing adjustment of the economy to the pandemic disruption heavily impacted the economy in the June quarter. Growth was slower as the 2022-23 year closed.

From the Chief Economist

Australia’s transition from the extremes of the pandemic and the war in Ukraine continued in the June quarter, throwing up some uncomfortable numbers in the National Accounts.

Real GDP rose by just 2.1 per cent in the year to June 2023, a direct response to the monetary policy tightening implemented by the Reserve Bank. Because overseas migration has been very strong, GDP on a per person basis was even weaker, contracting 0.3 per cent over the year.

Labour productivity contracted again, by 3.2 per cent through the year, which is a worrying sign for a central bank that wants it moving in the opposite direction to achieve its inflation target.

What is also obvious from the National Accounts is an economy that is slowly finding its equilibrium again.

Consumers focused on essential consumption over discretionary purchases in the quarter and, overall, their consumption was broadly flat. Households also spent less on renovations. The household saving ratio fell to its lowest since June 2008 as the ability to tuck extra income away continued to get harder. The catch-up in motor vehicle sales was an exception.

Inflation measures were marginally higher in the June quarter, but like the consumer price index, softer in year-ended terms, as past interest rate hikes did their job.

Firms invested and built capacity after their ability to supply fell short during the post-lockdown demand surge. The public sector invested in health and transport infrastructure, which is becoming more urgent as the population swells. Renewable energy projects, including solar and wind farms lifted non‑dwelling construction in the quarter.

The tightness in the labour market was still evident but it was not producing an ongoing acceleration in wages. Non-farm compensation of employees, per hour worked, was just 2.6 per cent in the 2022-23 financial year, down from 3.4 per cent in the previous year. New immigrants have helped the adjustment - particularly in industries related to the visitor economy that had tightened when international students were absent during the pandemic.

Commodity prices that surged because of the war in Ukraine retreated a little in the June quarter.

Better weather and more fluid supply chains, (including cleared quarantine backlogs, according to the Treasurer) also eased the movement of goods and resulted in a big change in inventories. That was a big drag on the GDP numbers, but not a sign of a demand deficient economy.

There were exceptions to the rebalancing theme. Rents were an obvious one, signaling deficient housing supply relative to strong demand. The Australian Bureau of Statistics noted a 34 year high in the quarterly rise in ‘rent and other dwelling services’ prices. And with new housing stock only rising slowly, while rental vacancies remain low and population growth high, it is possible that next quarterly rental increases will be even worse.

The economic story is intricate. Australia is in a transition phase after the collision of extreme events, and we should read the June quarter National Accounts in that context.

Household spending focused on essentials and motor vehicles

Growth in household consumption remained subdued in the June quarter, rising 0.1 per cent, after just 0.2 per cent growth in the previous quarter. Household consumption only contributed 0.1 percentage point to overall GDP growth, despite being the largest expenditure component of the economy, at just over 50 per cent of GDP.

Household consumption increased 1.5 per cent in the year to June, down from 3.5 per cent the previous quarter, making it the lowest growth figure since the peak of pandemic lockdowns (March 2021). Compared to an annual growth rate of 11.6 per cent in September 2022, the contrast is sharp.

The modest consumption outcome reflects cost-of-living pressures and sharply higher mortgage repayments for indebted households. Spending on discretionary purchases is typically more sensitive to changes in household incomes and wealth, as well as price levels. In response to the Reserve Bank’s 12 rate hikes, a greater proportion of household budgets were allocated towards essential items – such as food, housing, and health – and away from discretionary purchases.

Many discretionary categories detracted, with furnishings and household equipment, along with recreation and culture sectors most impacted – both having declined by 2.5 per cent throughout the quarter. Spending on vehicles was an exception, increasing 5.8 per cent, as supply constraints eased further during the quarter, rendering more vehicles available.

Essential purchases remained solid across the board, with food expenditure growing by 0.1 per cent and rental expenditure increasing by 0.5 per cent in the June quarter. Health and education expenditures rose by 0.7 and 0.5 per cent, respectively.

Nominal household spending continues to outpace the increase in gross disposable income. The impact of the Reserve Bank’s rate tightening is becoming more and more acute, with interest payable on dwellings growing 10.9 per cent through the quarter, the fifth consecutive quarter of double-digit growth. Mortgage interest payable summed up to $82.8 billion throughout the year – an 87 per cent increase on the previous financial year, and an annual all-time high.

Consumers had to lessen the share of income sent to savings to maintain that spending. The saving ratio fell from 3.6 per cent in the March quarter to 3.2 per cent, the seventh consecutive quarterly fall, bringing it to the lowest since June 2008.

Moving forward, household consumption is expected to remain subdued. A strong labour market and healthy balance sheets have allowed most households to shoulder the burden of rate hikes. Surveys have also suggested a slight turnaround in consumer sentiment as fears of further tightening diminish.

But with more individuals rolling off fixed-rate mortgages and the likelihood of a slightly higher unemployment clouding the outlook, further sacrifices to non-essential purchases are likely to transpire.

Renovations fall, more than outweighing new house building

Dwelling investment fell by 0.2 per cent in the June quarter, with a 2.4 per cent contraction in alterations and additions, more than offsetting a 1.2 per cent increase in new dwelling investment. New dwelling investment was mainly focused around apartments and townhouses rather than houses, given housing affordability is at its lowest in decades. Over the year to June, dwelling investment was down over 1 per cent.

Dwelling approvals fell by more than 10 per cent through the year to July. Nevertheless, there is still a sizeable pipeline of construction projects, with constraints to input and labour availability slowing things down. These constraints are starting to ease as supply chain pressures ease and the jobs market becomes slightly less tight.

Company profits took a hit and productivity declined further

Company profits fell 4.5 per cent in the June quarter, to be 1.5 per cent lower through the year.

The decline was driven by a double-digit fall in mining profits due to large falls in thermal coal and liquefied natural gas (LNG) prices (although partly offset by an increase in mining export volumes).

Wholesale trade profits also declined, driven by lower prices for petroleum, fertilisers and grains. Increased labour costs and operating expenses contributed to lower profit margins, particularly for the professional services industry.

Workers spent 2.4 per cent more time working than during the March quarter, which was the fastest increase in hours worked on record, as labour shortages continue to bite. Hours worked rose 6.8 per cent throughout the year, significantly elevated from the ten-year average growth rate of 1.8 per cent.

To the likely dismay of the Reserve Bank, productivity growth continued its downward trend, as measured by GDP per hour worked, falling 2.0 per cent in the June quarter and 3.6 per cent throughout the year. Meanwhile, unit labour costs increased 1.6 per cent through the quarter, up 7.5 per cent throughout the year. While these figures need to be considered in a longer-term context, they undoubtedly contain bad news.

The economy-wide wages bill increased further with compensation of employees (COE) up 1.6 per cent in the June quarter, 9.6 per cent higher through the year. Although this is slightly lower than the peak reached in the March quarter of 10.5 per cent. This reflects not just higher wages, but more employment and a higher number of hours worked.

Commodity prices retreated further

Australia’s terms of trade (the ratio of export to import prices) decreased by 7.9 per cent in the June quarter, reflecting a sharp fall in export prices (-8.2 per cent) relative to import prices (-0.3 per cent). This was largely driven by falling commodity prices for coal, LNG and iron ore due to a warmer than usual northern hemisphere winter and reduced demand from China. Overall, commodity markets softened as indicated by the 13.8 per cent fall in the Reserve Bank’s Commodity Price Index in the quarter.

The decline in import prices was mostly driven by falls in petroleum and fertiliser prices over the quarter, partly offset by price increases for gold and specialised machinery.

Health and transport infrastructure investment continued to support growth

Public demand increased through the quarter, contributing substantially to the growth outcome.

Government consumption rose by 0.4 per cent in the June quarter, up 1.4 per cent through the year. Spending was driven by the Federal Government, up 1.0 per cent in quarter, and was mainly non-defence spending.

Public investment was up a very solid 8.2 per cent in the June quarter, the highest quarterly growth rate in six years, after increasing 3 per cent in the previous quarter.

Federal, state and local governments contributed to this rise. National defence investment was up more than 16 per cent, and health and transport infrastructure investment also contributed to the rise through projects such as Snowy 2.0, the Western Sydney Airport, Brisbane’s Cross River Rail and Inland Rail.

Company and personal income tax receipts were very strong reflecting las year’s strong growth rate and this helped fund the public sector's investment spending. Company tax collections increased more than 30 per cent through the year to the June quarter, while personal income taxes increased more than 15 per cent.

Businesses continue to invest despite falling profitability

Private investment increased 0.6 per cent through the quarter, driven by a rise in new machinery and equipment (up 4.2 per cent) as businesses continued to invest in vehicles and other transport equipment. However, the construction industry saw investment decline.

Private sector investment intentions remained robust, despite the current economic challenges. Capex intentions for 2023-24 were over 7 per cent higher than the third reading for 2022-23. However, because this is in nominal terms, some of this growth reflects expected increases in the cost of capital goods and construction.

International students and tourists continue to flock to Australia

Net exports contributed strongly to growth, helped by international students and tourists flocking to Australia.

Exports grew 4.3 per cent through the June quarter, the biggest driver being travel services which increased 18.5 per cent. The number of international students and tourists continues to recover from the pandemic, with travel exports at 88 per cent of pre-pandemic levels. Mining exports also contributed to the strong result with improved weather and a further easing of supply constraints allowing for higher export volumes.

Imports increased 0.7 per cent through the quarter. Equally, travel services were the largest driver of this result as Australians travelled overseas, adding 11 per cent to international travel imports in the June quarter. Goods imports fell, driven by telecommunications equipment, clothing and footwear and electrical items, with these changes directly related to weaker consumer spending.

Despite net exports contributing to growth in the June quarter, there are downside risks to this source of economic growth given China’s slowdown and falling in prices for some of Australia’s major commodity exports.