GDP figures reflecting a flat economy

Today’s National Accounts data confirms what the RBA said in yesterday’s Cash Rate decision and what most households and businesses around Australia are already feeling; that economic activity is flat and growth has largely stalled. 

The June quarter GDP figures show Australia’s economy grew at a moderate 0.4%, with domestic economic activity essentially held up by the government sector. Annually this represented a fall to 2.1% y/y, from the 2.3% seen in the March quarter.

And notably, the figures show a rise in workers’ remuneration, but declining productivity. This will alarm the RBA, which sees the gap between wages and productivity as a key driver of inflation.

Domestic demand has lifted slightly during the quarter, largely driven by public sector spending – largely a result of government departments and agencies spending their budget allocations before the end of the financial year; private businesses have been running down their stock levels in the face of weaker demand from households and other businesses. 

Household consumption and residential construction activity remained flat, while private sector investment activity was still weak but at least positive – driven primarily from purchases of new machinery and equipment as businesses took the last advantage of the temporary full expensing accelerated tax deductions that finished on 30 June 2023.

• In Q2, compensation of employees (COE) rose 1.6% q/q – with private sector COE increasing by 1.8% and public sector COE by 1.2%. The growth in private sector COE was in line with wage price growth and strong hours worked, as the job market continued to be tight. Annually, this represents a 10.1%, driven by headcount increases, wage rises and bonus payments.
• Labour productivity continued to deteriorate in Q2 as GDP per hour worked declined by 2% q/q. Through the year, labour productivity was 3.6% lower as hours worked grew faster than output. The tight labour market may have resulted in lower-productivity in some sectors as they absorbed workers re-entering the workforce. The overall trend in productivity is troubling, particularly in an environment where wage growth is robust, and may be reflecting deeper structural issues.
• Real unit labour cost therefore rose sharply by 3.2% q/q or 5.8% y/y. This is the largest annual growth since Q3 2021 when the economy was recovering from the pandemic lockdowns

The bright spark on the economic horizon has been the external sector where net exports rose by $4.5bn over the quarter even though Australia’s Terms of Trade recorded the largest quarterly decline since the GFC (June quarter 2009). Overall, net trade contributed 0.8% to real GDP growth this quarter. This was driven by a stronger increase in exports, compared to imports.

• Government consumption spending was slightly higher in the June quarter 2023 compared to the March quarter, although public sector capital investment was strongly higher across both public corporations (+8.0% q/q) and the general government sector (+8.3% q/q).
• The near $3.4bn fall in inventories across the final quarter of FY23 nearly wiped out the economic gains from the super-strong growth in net exports (+$4.5bn) despite the fact that Australia’s terms of trade fell by 7.8% during that period.
• The big winners from an industry output perspective over the quarter included air transport (+8.0% q/q), coal mining (+5.8% q/q) and machinery and equipment manufacturing (+4.0%), while the sectors that struggled included mining exploration (-3.9% q/q), petroleum manufacturing (-3.9% q/q) and other mining activities (-2.5% q/q).

Taxes on production dropped by 0.5% due to a fall in taxes on international trade, partly offset by a rise in taxes on financial and capital transactions, excise tax and payroll taxes. On the other hand, subsidies on production rose 16% due to a rise in the fuel tax credits scheme, R&D tax incentives, and state energy and housing support.

• Household final consumption expenditure increased by 0.1% q/q driven by rises in purchases of vehicles (+5.8%), rent and other dwelling services (+0.5%), transport services (+3.2%), and electricity, gas, and other fuels (+2.2%).
• Offsetting these increases were reductions in purchases of recreation and culture (-2.5%), furnishings and household equipment (-2.5%), cigarettes and tobacco (-1.6%), and alcoholic beverages (-0.6%).
• The 4 percentage point increase in official interest rates since Q2 last year has led to a significant increase in mortgage payments. Dwelling interest payable as a share of total income payable has increased by 7 percentage points over the year. 
• Consumer debt as a percentage of total income has remained relatively low by historical standards, primarily thanks to a robust labour market. Nevertheless, recent indicators suggest a slight uptick in consumer debt due to elevated interest rates and the strain of rising living costs.Consumer debt as a percentage of total income has increased by 0.2 percentage points over the past year.

Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au