Australia’s economic growth slowed in the March quarter as rising spending by households, businesses and governments could not counter a dive in net exports.
In the first three months of 2022, gross domestic product rose to an annual rate of 3.3%, the Australian Bureau of Statistics said. That eased from the earlier reported annual pace of 4.2% and compared with about 3% forecast by economists.
The quarterly rate of growth was 0.8% reaching a record $527.7bn, and marked the second consecutive quarter of expansion. Wages showed a pick-up while several inflation measures rose, one to the highest in 34 years, stoking concerns that the Reserve Bank of Australia will have to hike interest rates faster and sooner to curb inflation.
The GDP growth pace was expected to slow after the ABS reported on Tuesday that the nation’s current account surplus had shrunk by $5.7bn to $7.5bn in seasonally adjusted terms for the quarter, shaving 1.7% off overall growth alone.
Domestic final demand, though, contributed 1.6 percentage points to GDP growth, with households making up half of that. Government spending delivered 0.6 percentage points of growth, driven by extra spending on health and flood relief in New South Wales and Queensland, the ABS said. Business, too, added to their stocks.
“Household consumption continued to drive growth this quarter,” said Sean Crick, the acting head of national accounts at the ABS. “Following the easing of Covid-19 restrictions, household spending on transport services, hotels, cafes and restaurants, and recreation and culture increased.”
The quarterly GDP numbers are the first major economic figures to be released since the Albanese Labor government took office after their 21 May election victory.
The March data provided a snapshot of the momentum of the economy that the incoming ministers inherited. It also showed price pressures were mounting at the start of the year, supporting the case for another rise in official interest rates when the RBA board meets next Tuesday.
The new treasurer, Jim Chalmers, said the figures were a glimpse of the “economic mess” Labor had inherited from the Morrison government.
“Skyrocketing inflation is a big challenge, falling real wages is a big challenge, and the impact of interest rate rises that the Reserve Bank governor [Philip Low] has flagged is a big challenge,” he said.
“Even where some of these numbers on the surface might be pleasing compared to some of the diabolical numbers we’ve had over the last couple of years, they’re still short of what the former government was hoping for.”
Australia facing ‘perfect storm’ in energy market
Among the deviations from the pre-election fiscal outlook prepared by treasury was a quarterly GDP growth pace of 0.8%, compared with 1.8%, Chalmers said. Similarly, new business investment at 1.4% was about half the forecast 2.7%, while exports shrank 0.9% versus the 4.2% growth predicted in the outlook.
Not captured by Wednesday’s national accounts was the emergence of “a perfect storm of conditions and challenges in our energy market”, Chalmers said, referring to soaring wholesale electricity and gas prices, which have already forced some market caps to be introduced and retailers to turn away customers.
Australia’s economy shrank less than many other rich nations during the pandemic and its rebound has also been less dramatic than some. The European Union’s economies, for instance, expanded 5.1% in the March quarter from a year earlier, and the UK posted an 8.7% jump.
The US grew at an annual clip of 3.6% although rising interest rates pushed the world’s largest economy into a 1.4% quarter-on-quarter contraction. That fate may extend to other countries as their central banks hike interest rates to curb inflation.
The deflator used by the ABS to correct for price increases in Australia rose 2.9%, the fastest pace since the March quarter of 1988.
For the goods and services we trade with the world, export prices rose 9.6% while the cost of imports rose 3.5%. Russia’s invasion of Ukraine in February was partly responsible, although commodity prices started to rise before then.
For domestic demand, the “price deflator” increased 1.4%, the highest since the GST’s introduction in 2000, reflecting strong demand and rising costs. The 5.1% headline consumer price inflation reported last month for the March quarter was also at two-decade highs.
Compensation to employees rose 5.5%, a number that economists will also zero in on. Before Wednesday’s data release, ANZ had said a 5% pace would keep speculation of a 40 basis point rise in the cash rate at the June RBA meeting “very much alive”.
Investors earlier this week were already rating that there was a three-in-four chance the RBA raising would life the cash rate to 0.75% when the board meets on Tuesday.
Ahead of today's release of the March Qtr GDP data, investors estimate the chance of an RBA cash rate rise to 0.75% (up from 0.35%) as 78%. #auspol pic.twitter.com/xgpwdcd5dC
— Peter Hannam (@p_hannam) May 31, 2022
The household savings dropped two percentage points to 11.4%, financing the 1.5% increase in consumer spending. Sally Hunter, a senior economist at KPMG, said the ratio remained “comfortably above pre-pandemic levels”.
“Households are still relatively well-placed to weather the emerging headwinds, from higher inflation and rising interest rates,” Hunter says. “Notwithstanding this, momentum in spending is expected to cool through the rest of the year, as these drags combine with the end of the boost generated by the relaxation of restrictions.”
The floods in NSW and Queensland squelched growth in the construction sector, cutting it to just 0.2% even as governments and businesses were busy pouring money into projects all over the country.
Hunter, though, was wary about reading too much into the growth of total compensation for workers, noting they rose at a quarterly pace of 1.8%, or less than the 2% pace during the December quarter.
Profits for the mining sector were up 14.7%, accounting for more than half of all corporate profits.
Among the states, Victoria led growth in final demand, ahead of Western Australia, with Tasmania the laggard.
