Australian GDP growth slowed over 2023, up by just over 2%pa in September, clear signs that rate hikes are working to slow activity

The Australian economy expanded by just 0.2% in the September quarter, according to the quarterly gross domestic product (or GDP) data released today which was below consensus estimates of 0.4% (we assumed +0.6% because of strong partial data in the days preceding the GDP release). The downward surprise to our forecast came from a fall in farm and public authorities’ inventories. GDP growth was running at 2.1% over the year to September, which is considered weak for Australia, as more normal levels of GDP growth should be closer to 2?-3% (after accounting for population and productivity growth). The pace of growth in the economy slowed in 2023, with annual growth starting 2023 at 2.4% and likely to end the year at under 1.5% per annum.

Per capita GDP growth fell by 0.5% over the quarter and is 0.3% lower over the year. This is the third consecutive quarterly fall in per capita GDP growth which can also be considered a “per capita recession” (which has happened multiple times in the past – see the chart below). We think per capita GDP growth should improve in mid-2024 as population growth slows and GDP growth increases.

Consumer indicators were all weak. Consumer spending was flat over the quarter. Government rebates on electricity and childcare led to a drop in household essential spending (and lifted government spending) so the weakness in household spending this quarter is overstated. Discretionary spending rose in the September quarter due to a 13% lift in the purchase of vehicles as supply-chain issues have improved, rent rose by 0.4%, furnishings and household equipment rose by 1.6% and transport services lifted by 3.9% with spending on eating out and transport boosted by the Women’s World Cup which we already knew from the monthly retail data.? However, household spending has clearly slowed over the past year as discretionary household spending is down by 0.8% over the year while essential spending has been flat-lining and was up by 1.2% over the year to September.

Household gross disposable income rose by just 0.1% over the quarter and is 1% higher over the year, its lowest pace of annual growth since September 1991, with taxes detracting large chunks of income in recent periods because of bracket creep.?

The household savings ratio fell to 1.1%, its lowest level since December 2007. Households are eating into their accumulated savings at a faster pace compared to prior periods and on our estimate’s, total accumulated savings have fallen to $183bn, from a peak of around $237bn in September 2022 (which has also been downwardly revised). The savings ratio is likely to go negative over coming quarters.

Residential investment rose by 0.2% (and made no contribution to growth), with a 0.3% fall in new dwelling investment and a 1% rise in alterations and additions (the first rise after 7 consecutive quarters of falls) as supply chain pressures eased. The building backlog remains high which will support housing construction over coming quarters.

Private business investment rose by 1.5% and added 0.2 percentage points to growth, as new building fell by 1.5%, engineering construction rose by 2.3%, machinery and equipment was 0.2% higher and intellectual property rose by 1.6%. The capital expenditure survey showed that the outlook for business investment remains positive, but growth is likely to be lower compared to 2022.

Public spending rose by 1% (adding 0.3 percentage points to growth) with a strong 1.1% in consumption and 0.7% lift in investment.

Inventories added 0.4 percentage points to growth, with a large fall in public and farm inventories offset by a big rise in mining stocks.

Net exports detracted 0.6 percentage points from growth with exports down 0.7% and imports up by 2.1%. The pace of import growth should soften in 2024 as domestic demand slows.

Price indicators in the GDP figures include the GDP implicit price deflator which is the broadest measure of prices across the economy and showed an increase in prices of 1% over the quarter and 2.4% over the year which is lower than the consumer price index (which was up by 5.4% over the year to September). The domestic demand deflator is a better gauge for consumer prices and was stronger at +1.3% over the quarter or 5.2% over the year, closer to the CPI figures. Real unit labour costs rose by 1.2% or 3.9% over the year which is down from 4.9% last quarter and is more consistent with the inflation target (although further declines are still required) which would please the RBA.

There were some encouraging trends in productivity because of a decline in hours worked. Productivity growth rose by 0.9% over the quarter, the first increase since March 2022 but is still 2.1% lower than a year ago and well below the 10-year average (see the chart below). The RBA has been looking for an improvement in productivity growth because it helps to slow growth in real unit labour costs (which have been too high and adding to inflation).

The GDP data is a relatively delayed data series (relative to other releases) and is not a forward-looking signal for the economy. But, it rubber stamps the performance of the economy at a certain point in time. Today’s data confirms that economic activity has slowed in 2023, as monetary policy has been tightened, a sign that interest rate hikes are having an impact on the economy. The data is a touch higher than the RBA’s latest forecasts released in November because historical growth was revised up slightly but wouldn’t change the RBA’s outlook for 2024. We still see economic growth undershooting the RBA’s projections in 2024, which is also why we expect interest rate cuts to start from mid-2024 but are also mindful that the RBA’s hawkishness in recent months means that there could be the chance of another hike in February, following the December quarter inflation figures in late January.