The Growth Story: Devil Lies In The Detail

Australia, often dubbed the Lucky Country, has benefited from fiscal measures that helped avert an economic downturn and notably contributed to reducing household costs as rate hikes continue to pass through. 

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. 

Nonetheless, the private sector's robust business investment, particularly in non-dwelling construction, supported the economy. Conversely, the downturn in new machinery and equipment purchases, the first since September 2022 due to reduced agricultural spending, underscores sectoral challenges. Public investment, mirroring a decline since the September quarter of 2022, reflects the near-completion of state and local government infrastructure projects in transport and health.

Policy Implications

Today's data provides a favourable backdrop for the Reserve Bank of Australia (RBA), allowing it to maintain its focus on controlling inflation without significant concerns about a sharp economic downturn. This cements our confidence in our base case of a hold by the RBA, until the first rate cut in 3Q this year. The alignment of fiscal and monetary policies appears to have begun, offering a more cohesive approach to economic management. Simply put, at this point in time the RBA appears to have done enough to control expenditure. Government subsidies are no longer working against its efforts to tame inflation but appear to have provided just enough financial relief to support households through this tough period.

Having said that, the devil lies in the details. Digging under the hood, per capita economic performance remains disappointing and will continue to be so in the months ahead. The labour market is key from a domestic consumption perspective now. We have already seen early signs of the labour market cooling and the RBA’s business liaison surveys suggest softening hiring intentions in the months ahead. As this materialises, the direct impact would be on earning capacity – weakening consumption further in the early months of this year. We see an accelerated downturn in consumption as a risk to our call that could compel the RBA to contemplate rate cuts earlier than projected.

4Q23 GDP Movers & Shakers

The Australian economy experienced a modest growth of 0.2 per cent in the December quarter, contributing to a cumulative 1.5 per cent increase since December 2022, as reported by the Australian Bureau of Statistics (ABS). Government spending and private business investment emerged as primary drivers of GDP growth during the quarter. Despite the steadiness observed in December, growth slowed across each quarter in 2023.

Government final consumption expenditure rose by 0.6 per cent, fueled by increased spending on medical products and services, alongside higher employee expenses across commonwealth departments. However, defense spending saw a decline of 3.5 per cent, offsetting some of the growth. On the private sector front, a 0.7 per cent increase in investment, particularly in non-dwelling construction, supported economic expansion. Conversely, new machinery and equipment purchases declined by 1.3 per cent, indicative of reduced agricultural spending, while public investment fell by 0.2 per cent, attributed to nearing completion of infrastructure projects by state and local governments, partially offset by increased investment by public corporations.

Net trade contributed positively to GDP growth, with a notable decrease in imports by 3.4 per cent. However, exports saw a slight decline of 0.3 per cent, primarily driven by decreases in exports of non-monetary gold and rural goods, partially compensated by rises in coal and mineral ores exports. Inventories experienced a downturn, reflecting reduced imports and impacting GDP growth negatively. Household spending remained subdued, with a marginal rise of 0.1 per cent, predominantly in essential categories, while discretionary spending areas saw declines. Compensation of employees rose by 1.4 per cent in the December quarter, with public sector wages driving the increase. Additionally, the household saving ratio increased to 3.2 per cent following eight quarters of falls, propelled by increased income received by households, notably from government payments and reduced income tax paid.                   
 

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