Real GDP Growth Slowed To Crawl In March Quarter

A key theme of my recent commentary on economic conditions has been the persistence of two-sided economic risks. Yes, Australia has a pressing inflation problem, with the headline CPI inflation rate now having been stuck at or above the top of the RBA's target band for 12 consecutive quarters and counting. But the cost of the disinflationary process to date also means that economic growth has been very weak.

As well as inflation risk, we also need to pay attention to growth risk. This week's release of the March quarter 2024 national accounts served as an important reminder of that point, with the data showing that the overall pace of economic activity slowed to a crawl over the first three months of this year. Set aside the pandemic period, and this was the weakest rate of annual real GDP growth reported in more than thirty years. Strip out the effects of population growth, and economic activity has now gone backwards for five consecutive quarters, leaving the Australian economy locked in a persistent per capita recession.

The key messages here are that policymakers are still navigating that now-notorious 'narrow path' between inflation and recession, and that this balancing act remains the defining feature of the near-term economic outlook.

Before diving into a bit more of the detail, a quick note to say thanks to those of you who were able to attend this week's economic update in Melbourne in person or online. I really appreciate your support and hope you found the session useful. Also, this week's travel commitments mean that this version of the weekly update is a little shorter than would be usual for a GDP week edition. My apologies.

Real GDP rose by just 0.1 per cent over the first quarter of this year

The ABS said that real GDP rose by 0.1 per cent over the March quarter (seasonally adjusted) to be up 1.1 per cent over the year. Although that marked a tenth consecutive quarter of GDP growth, it was also the weakest annual growth rate recorded since the December quarter 2020 and the slowest in more than three decades excluding the COVID-19 period. It was also the softest quarterly result since the September quarter 2022. And the outcome was weaker than market expectations, with the consensus forecast having predicted 0.2 per cent quarter-on-quarter and 1.2 per cent year-on-year outcomes.

Some points of note:

• On a per capita basis, real output fell for a fifth consecutive quarter, shrinking by 0.4 per cent relative to the December quarter and declining by 1.3 per cent in annual terms.
• Labour productivity - measured as GDP per hour worked - was flat across both the quarter and the year.
• Real unit labour costs fell 0.7 per cent over the quarter but were still up 3.4 per cent in annual terms.
• Regarding the key growth drivers, domestic final demand contributed 0.2 percentage points to quarterly GDP growth, with consumption contributing 0.4 percentage points (government and household consumption each contributing 0.2 percentage points) and investment subtracting 0.2 percentage points. Net trade subtracted a further 0.9 percentage points from growth as a rise in imports of goods and services (up 5.1 per cent) comfortably outpaced export growth (up just 0.7 per cent). But an increase in inventories added 0.7 percentage points to the growth outcome.
• Household spending was up 0.4 per cent over the quarter, driven mainly by expenditure on essential goods and services including electricity, health, rent and food (up 0.5 per cent quarter-on-quarter) while discretionary spending was 0.3 per cent higher with the ABS highlighting record attendance at large scale sporting (Formula One) and music (Taylor Swift) events driving spending on hotels, cafes, and restaurants and on clothing and footwear. Household spending was also revised up for the previous December quarter as the ABS said that households spent more on overseas travel than previously estimated. Interestingly, that suggests that household consumption overall has been running a little stronger than previously estimated, although it remains the case that in per capita terms consumer spending has been contracting for more than a year now.
• The household saving ratio fell from 1.6 per cent in the December quarter last year to 0.9 per cent in the March quarter of this year as the rise in (current price) household consumption ran ahead of growth in gross disposable income. The ABS noted that total savings have now remained below two per cent for a year for the first time since the March quarter 2008, and that growth in household income received was the lowest since December 2021, reflecting relatively small rise in compensation of employees and investment income received this quarter.
• Private investment fell 0.8 per cent over the March quarter although it was up 1.9 per cent in annual terms. Dwelling investment was down 0.5 per cent quarter-on-quarter and fell 3.4 per cent year-on-year. Ownership transfer costs fell 2.2 per cent in quarterly terms while rise 5.6 per cent on an annual basis. Total private business investment also declined over the quarter (dropping by 0.8 per cent in the first fall since the June quarter 2020) while rising over the year (up 3.6 per cent). Non-dwelling construction fell in the March quarter while expenditures on machinery and equipment and on intellectual property resources were both up.
• Nominal (current price) GDP rose 1.4 per cent over the quarter and 3.5 per cent over the year.
• Australia's terms of trade rose 0.2 per cent over the quarter as lower commodity prices fed through into lower export prices that were in turn offset by larger declines in import prices. That left the terms of trade down 7.3 per cent compared to the March quarter last year.

FWC wage decision was announced

The Fair Work Commission (FWC)'s Annual Wage Review decision 2023-24 was announced this week. The FWC decided to increase the National Minimum Wage and all modern award minimum wages by 3.75 per cent, effective from 1 July 2024. That was well down on last year's 5.75 per cent increase but above the current rate of inflation of 3.6 per cent.

The FWC said that the increase balanced the fact that in real terms modern award minimum wages remained below where they were five years ago, and that this was generating significant financial stress, against the judgment that it was 'not appropriate…to increase award wages by any amount significantly above the inflation rate…because labour productivity is no higher than it was four years ago and productivity growth has only recently returned to positive territory.' The Commission said that in its view, the increase was 'consistent with the forecast return of the inflation rate to below three per cent in 2025.' Several forecasters had anticipated an increase of between 3.5 and four per cent, meaning that this week's announcement was broadly in line with expectations.

The FWC reckons that about 20.7 per cent of the Australian workforce are paid in accordance with the minimum wage rates in modern awards. Add in workers that have their pay indirectly influenced by award rates, and the Commission estimates that about a quarter of all Australian employees will have their wages influenced by this week's decision. It also says that most of these are part-time workers, are predominantly women, and almost half of them are casual employees. The total wages cost of the modern-award reliant workforce accounts for less than 11 per cent of the national 'wage bill.'

What else happened on the Australian data front this week?

CoreLogic said its National Home Value Index rose 0.8 per cent over the month in May 2024 to be up 8.3 per cent over the year. This was the 18^th consecutive monthly increase and the largest monthly rise since last October, with the data provider saying that an ongoing mismatch between housing demand and supply continues to trump rising affordability pressures. At the same time, CoreLogic reported that its national rental index rose by 'just' 0.7 per cent last month, marking the lowest monthly change since December last year. The annual rate of rental growth has also eased, with national rents up 8.5 per cent over the past 12 months, down from annual growth rates of 8.9 per cent a year ago and 9.3 per cent two years ago.

The ABS said that new loan commitments for housing rose 4.8 per cent over the month (seasonally adjusted) in April 2024 to be 24.6 per cent higher in annual terms. Lending to owner occupiers rose 4.3 per cent month-on-month and 18.7 per cent year-on-year while the corresponding increases for lending to investors were 5.6 per cent and 36.1 per cent, respectively. The Bureau commented that the growth in investor lending likely reflected expectations of higher rental yields as well increased borrowing capacity. The ongoing strength in lending is also consistent with the CoreLogic story of still-rising housing values above.

According to the ABS's Government Finance Statistics, in the March quarter of this year, the general government net operating balance rose $1.5 billion to $4.2 billion. The Bureau also published some insights into the finance data.

The ABS said that Australia ran a current account deficit of $4.9 billion (seasonally adjusted) in the March quarter 2024. That was down from a (revised) surplus of $2.7 billion in the December quarter 2023. The move into deficit reflected a combination of a smaller trade surplus due to a rise in goods imports alongside an increase in the net income primary deficit reflecting higher profits to foreign investors, particularly in the LNG and industrial real estate sectors. The Bureau also reported that Australia's net international investment liability position narrowed to $730.3 billion - its lowest level since the June quarter 2009 - as our foreign assets grew faster than our foreign liabilities. Australia's net foreign equity asset position hit a record high of $505.5 billion in the March quarter while the net foreign debt liability position rose to $1,235.7 billion reflecting Australian dollar depreciation.

Australia's seasonally adjusted goods trade balance was $6.5 billion in May 2024, up $1.7 billion from April's result. According to the ABS, exports were down $1.1 billion (a 2.5 per cent fall) over the month while imports fell by an even steeper $2.8 billion (a 7.2 per cent drop).

The ANZ Roy Morgan Consumer Confidence Index was little changed for the week ending 2 June 2024. It was up just 0.3 points on the previous week's reading, at an index level of 80.5. Confidence has now been below an index reading of 85 for 70 consecutive weeks. The measure of weekly inflation expectations rose 0.1 points to five per cent.

For the week ending 11 May 2024, payroll jobs were up 0.1 per cent over the month and 1.2 per cent higher over the year. The ABS said that the small rise was less than the usual post-Easter and school holiday rebound, consistent with slower payroll job growth this year than last, as well as reflecting some differences in the timing of school holidays.

Business Indicators for the March quarter 2024.

Last Friday, the ABS published its latest estimates for the economic and financial performance of Australian industry in 2022-23.

Other things to note . . .

• The ABS has 12 insights about the Australian economy during the March quarter 2024.
• The Secretary to the Treasury's Opening Statement to the Economics Legislation Committee.
• Interesting AFR interview with Andrew Hauser, the RBA's new deputy governor.
• John Buchanan on this week's FWC decision.
• A Productivity Commission submission on adopting Artificial Intelligence.
• Grattan on reforming points-tested visas.
• In the Lowy Interpreter, Jenny Gordon analyses some of the economic messages - including shifting Australian attitudes to China - highlighted by this year's Lowy Poll.
• The Economist magazine offers an international take on the rental crisis.
• The June 2024 edition of the IMF's Finance & Development magazine.
• The WSJ is running a series of pieces this week on the global chip battle.
• Also from the WSJ, has AI been overhyped?
• On the East Asia Forum, Gary Hufbauer argues that the Biden-Trump move to tariffs marks a turning point in world economic history.
• BCG on the business implications of the end of free trade.
• An FT Big Read considers the transformative potential of computerised brain implants.
• On influencer cartels.
• Our world in data asks, is the number of natural disasters increasing? The article reviews data gaps, reporting biases, and other measurement issues.
• The Odd Lots podcast looks at algorithmic pricing. See also this article on the Age of Recoupment.