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.