Household saving fell as the rise in household spending and interest payable on mortgages outpaced growth in gross disposable income. The saving ratio hit pre-pandemic levels, lowering from 8.3 per cent of income to 6.9 per cent in the September quarter. Consumers recently used the build-up in savings to cover their rising expenses and discretionary spending. As interest rates rise further and income from social benefits falls post-COVID-19 lockdowns, consumption will suffer or saving will fall further.
A pullback in spending by consumers is expected due to a combination of rate hikes, higher prices for basics, falls in real wages and declining house prices. The strong labour market and a significant share of mortgage holders on very low fixed mortgage rates has supported consumption, however, as many of these mortgages are rolled over from very low to high rates next year, consumption growth will slow and may even recess.
Elevated government spending is not suited to an economy with skills shortages and capacity constraints
Government spending rose by just 0.1 per cent over the quarter supported by spending at the state and local government levels, as well as a rise in national defence spending.
Despite the large pipeline of infrastructure projects across the country, public investment fell over the quarter by 3.4 per cent, with falls in both federal and state and local government spending. This was offset somewhat by government-owned public corporations.
Both government consumption and investment as a percentage of GDP remain elevated compared to historic levels. This level of government spending is exacerbating skill shortages and capacity constraints within the economy, as well as adding to inflationary pressures, making the RBA’s job harder.
Despite facing economic challenges, businesses continue to invest in the future with business investment rising 2.5 per cent in the September quarter, largely due to infrastructure spending. Private investment rose by 0.8 per cent in the quarter, driven by rises in both residential and non-residential construction, as the sector saw a moderation in supply constraints. The rise was somewhat offset by falls in investment in machinery and equipment (down 2.7 per cent) and a 11.2 per cent fall in ownership transfer costs which reflect real estate and property transfer costs.
Rebound in dwelling investment follows a slight easing of capacity constraints
After three consecutive falls, dwelling investment increased 1 per cent through the quarter. The rebound in activity was driven by an easing of ongoing labour and material shortages, as well as a strong pipeline of housing projects due to the stimulus provided during the pandemic. Moreover, despite the devastating New South Wales floods in July, the quarter saw fewer wet weather impacts relative to previous quarters.
Dwelling investment for new properties rose by 3.4 per cent in the September quarter, while investment in alterations and additions fell 2.2 per cent.
Lower levels of housing market activity due to three consecutive 50 basis point interest rate hikes during the September quarter (plus a 25 basis point move in May and 50 basis points in June) have led to a sharp fall in ownership transfer costs. These were down 11.2 per cent, yet transfer costs are still up 19 per cent compared to pre-pandemic levels. The three consecutive 25 basis point interest rate hikes in the December quarter will likely see further falls in ownership transfer costs.
Growth in imports offsets rises in travel and rural exports
Net exports detracted 0.2 percentage points from growth, as rising imports (3.9 per cent) more than offset the rise in exports (2.7 per cent).
Exports contributed 0.6 percentage points to growth, driven by a rise in goods and services exports. Services exports were supported by arrivals of international students and tourists following the re-opening of Australia’s international borders. Goods exports were supported by a surge in rural exports (mainly wool and cotton) and mineral ores, offsetting falls in exports of coal and gas due to weather and other disruptions.
Imports more than offset this increase (detracting 0.8 percentage points from growth) due to the rising number of Australians travelling overseas.
Changes in inventories contributed 0.2 percentage points to growth after a fall in the June quarter, with the largest contributors mining and retail trade, in the lead up to Christmas.
Strong household consumption across the states and territories
State final demand rose in all states and territories with the exception of Victoria where growth stagnated. This follows a strong performance in 2021-22 (see our recent state and territory analysis here). Key contributors to increased domestic activity were centered around hospitality and travel-related expenditure which increased across most states and territories. In Western Australia, transport services increased more than 30 per cent over the quarter as travel rebounded after borders reopened in the March quarter of 2022.
In Victoria, increases in private consumption and investment were offset by falls in public consumption and investment as the government reduced health-related spending and acquired fewer assets.
The Northern Territory saw the strongest quarterly growth of 2.7 per cent on the back of increased investment in residential construction, road infrastructure and utilities.
The recent floods in New South Wales have led to increased government expenditure across the affected regions due to assistance and repairs. Despite the conditions, New South Wales saw positive growth, with state final demand increasing 0.7 per cent through the quarter.
Increases in final consumption have been partly offset by a slowdown in the residential property market that is beginning to respond to the rate hikes delivered by the RBA. This led to decreases in housing transfer costs across most states and territories, most notably in Victoria and New South Wales which recorded declines of 10.4 and 15.5 per cent over the September quarter.