Five key takeaways from the latest GDP data

Pendal

September 2024

TODAY'S June quarter GDP numbers paint a reasonably bleak, but not unexpected, picture of the Australian economy.

Quarterly GDP was 0.2% for the third consecutive quarter, leaving annual growth at 1%. It was the weakest financial year - excluding the Covid hit of 2020/21 - since the recession of 1991/92.

We are avoiding a technical recession overall this time, but the consumer is going backwards - even with 2.5% population growth.

Remember, the main GDP you hear reported is a chain volume, not price measure.

I prefer looking at numbers on a state basis, split into consumption and investment. This gives a better picture of what is going on in the economy.

Source: ABS

Here are five key takeaways from today's numbers:

1. Government spending remains strong despite government investment tapering off

Government expenditure contributed 0.3% to GDP, government investment 0.1%, while government spending rose by a strong 1.4%.

The main driver is social benefit programs for health services (largely the NDIS).

This also remains a major source of strength for employment and inflation, and is central to the current animated debate between Treasurer Chalmers and the RBA (though Governor Bullock has wisely toned down prior comments, leaving RBA proxies to continue it).

State governments are also major drivers of growth and inflation.

However, NSW has now seen government investment go negative (down 3.8%) as major projects like the Metro are completed. Victoria (up 5.4%) and South Australia (up 5.8%) clearly didn't get the RBA memo asking for restraint.

2. Households are going backwards again

Household expenditure fell by 0.2% over the quarter, leaving it up only 0.5% on the year. Each person is buying 2% less of goods and services than a year ago.

NSW was particularly hard hit (down 0.6%) for the quarter, with Queensland (up 0.1%) and WA (up 0.4%) bucking the trend.
Maybe tax cuts and assorted subsidies bring back the consumer in Q3, but early data from July suggests it may be a slow burn.

3. Households are barely saving anything

The national accounts do not directly measure savings - it is a residual item after income and expenditure are calculated.

However, it does give an insight into household behaviour. The saving ratio remained at 0.6%. 

Source: ABS

Now, there can be opposing explanations of a fall in the savings ratio.

On the positive side, it can reflect animal spirits as optimistic consumers go on a spending spree, believing their finances are strong - we saw this pre-GFC when the savings rate regularly went negative.

However, it can also reflect that in the nominal economy, income growth is not exceeding price growth, meaning consumers need to either save less or draw down on existing savings.

Given current rates and sluggish spending, this is a better explanation.

4. Australia's commodity boom is waning (negative for GDP) but remains historically strong

Australia's terms of trade - the prices we receive for our exports versus what we pay for our imports - fell 3% in the quarter.

Import prices were flat but export prices, dominated by bulk commodities, fell 3%. It is down 6.4% from a year ago.

The terms of trade peaked in June 2022 and is now around 20% lower, but it still remains slightly above the post-GFC average. The main impact for governments is a tapering of the "rivers of gold" from royalties and mining company taxes.

On a more positive note, service exports are growing strongly again (up 5.6%), though recent Federal Government overseas student policy announcements may dampen this.

5. Finishing on an optimistic note, GDP should pick up from here

A lot is being made, especially by the government, around the positive impact that tax cuts and subsidies should have in the year ahead.

Of more importance, though, is the fact that for the first time since the inflation boom of 2022, incomes are increasing faster than inflation. This real wage growth is being driven by falling inflation, which will continue in the year ahead.

The RBA is forecasting GDP of 1.7% for 2024 and 2.6% for 2024/25. Given the first two quarters of this year are only up 0.4%, the RBA is expecting a 0.6% to 0.7% quarterly rises over the next year.

This may seem a bit optimistic, but the possibility of rate cuts and falling inflation could well see a decent rebound in the economy.

Public demand should moderate over the medium term, but current reforms will take time.

The fact it is an election year for the Federal Government should see public demand remain around 4%, meaning household consumption need only return towards 2%, or population growth, for its forecast to be hit.

Author: Tim Hext

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