2Q24 GDP: Public Sector Drives Australia’s Sluggish Economic Growth Amid Private Sector Struggles

Australia has yet again benefited from fiscal measures that helped avert an economic downturn in the June quarter. 

A closer examination of the data underscores a lingering cautiousness in household consumption sentiment, as evidenced by the restrained spending primarily confined to essential categories. This comes after rather solid spending in the previous quarter due to a slew of sporting and music events.

Growth in government consumption increased 1.4 per cent. Commonwealth social assistance benefits to households led the rise, with continued strength in expenditure on national programs providing health services. State and local government expenditure also rose with increased employee expenses across most states and territories, as noted by the Australian Bureau of Statistics (ABS).

Meanwhile, businesses grappled with lacklustre consumer spending weighing heavily on company profits which has resulted in reduced spending and investment by businesses themselves. 

In a nutshell, the public sector is key in keeping growth positive as it offsets the evident weakness in the private sector. 

Policy Implications

Today’s data are a mixed bag for the Reserve Bank of Australia (RBA). The 2Q24 weakness is no surprise when faced with the trifecta of sticky inflation, higher interest rates and constrained consumer spending.

The household savings ratio remained unchanged at a modest 0.6, highlighting the eroding savings buffer which supported Australians until a few months ago. Household spending meanwhile slid 0.2 per cent. Per capita economic performance remains disappointing and will likely continue to be so in the months ahead. While this is good news to alleviate the central bank’s concerns around demand-driven inflationary pressures, the bad news is that reduced consumer activity has a direct impact on business activity and by extension on overall economic activity.

Not only are businesses facing the prospect of an extremely slow recovery in operations, they are also having to contend with sub-par productivity growth putting some upward pressure on unit labour costs. This isn’t something the RBA is particularly likely to be happy about as it remains concerned about stickier services inflation.

Overall, today’s data does little to move the needle for the RBA and we expect it to stay pat at 4.35 per cent in the upcoming policy meeting later in the month. However, the policymakers would be concerned about the evident weakness in economic growth and mindful of the downside risk this poses to their policy decision while being acutely aware of the next two quarters likely showing improved economic performance as the fiscal spending outlined in the Federal Budget gain traction.

2Q24 GDP Movers & Shakers

The Australian economy experienced a modest growth of 0.2 per cent in the June quarter. Annually, the pace of growth moderated to 1.0 per cent, the slowest since 1991, outside of a pandemic. The weak growth is a result of muted household demand, which was somewhat offset by growth in government consumption.

GDP per capita was down for the sixth consecutive quarter, falling 0.4 per cent while household spending fell 0.2 per cent. The household savings ratio was unchanged at 0.6 per cent in the June quarter. In annual terms, the saving ratio was 0.9 per cent – the lowest since 2006-07.

Meanwhile, gross disposable income rose 0.9 per cent, outpacing a rise in nominal household spending of 0.7 per cent. A modest increase in compensation of employees (1.0 per cent), which was partly offset by an increase in income tax payable (3.1 per cent), drove the soft increase in gross disposable incomes. 

Government spending grew 1.4 per cent, fueled by non-defence spending. State and local expenditure further supported Federal spending which was particularly evident in a rise in employee expenses.

Total investment fell 0.1 per cent in the June quarter led by fall in new machinery and equipment investment (-1.6 per cent) in agriculture and retail. This was partly offset by ownership transfer costs, which rose 3.9 per cent with strong activity in the property market. Meanwhile, the wholesale and manufacturing industries both experienced run downs in inventories. This reflected falls in some capital and intermediate goods import categories, including machinery and industrial equipment and processed industrial supplies.

Services exports drove a net trade contribution to growth following falls in the previous two quarters. This was led by education-related travel services.
 

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