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GDP growth moderates further as high inflation and rates take their toll

4 minute read

Australia experienced its fifth consecutive rise in quarterly GDP during Q4 2022, but the rate of growth eased for the second quarter in a row.

Australia’s economy expanded 0.5 per cent in the final quarter of 2022 and 2.7 per cent over the year, according to the national accounts released by the Australian Bureau of Statistics (ABS) on Wednesday.

The quarterly GDP result was below market forecasts for a rise of 0.8 per cent, while the annual lift was in line with expectations. ABS head of national accounts, Katherine Keenan, said that final consumption and net trade were the biggest drivers of growth.

“The 0.4 per cent rise in total consumption and 1.1 per cent rise in exports were the primary contributors to GDP growth in the December quarter,” she said.

“Continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports.”

According to Treasurer Jim Chalmers, the national accounts confirmed that growth in the local economy is “moderating as expected” with “substantial and growing challenges” ahead.

“This is an inevitable consequence of a global economic slowdown, high inflation, rising interest rates and an international energy crisis,” he said.

“These numbers reflect the reality of rising interest rates and capture the impact of the cost‑of‑living pressures affecting Australians.”

Household spending rose by only 0.3 per cent during the quarter, contributing 0.2 percentage points to GDP, and was 5.4 per cent higher over the year.

“After four quarters of strong growth following the Delta-variant lockdowns, growth in household spending softened in the December quarter,” said Ms Keenan.

“Spending on discretionary services drove the rise in household consumption, however, growth markedly slowed in comparison to the September quarter.”

The terms of trade rose 0.6 per cent during the quarter and 7.2 per cent over 2022, driving real gross domestic income to 4.4 per cent through the year. 

The ABS also reported that the household saving to income ratio fell for the fifth consecutive quarter, from 7.1 per cent to 4.5 per cent, reaching the lowest level since September 2017. “The fall was driven by increased interest payable on dwellings, income tax payable, and increased spending,” Ms Keenan explained.

Reacting to the national accounts, ANZ senior economists Felicity Emmett and Catherine Birch said that activity, price, and wages pressures were more subdued than anticipated.

“[Wednesday’s] report suggests the economy is slowing under the weight of higher prices and interest rates, with consumer spending recording outright falls in two states. Inflationary pressures, while past the peak, remain strong,” they said.

According to Ms Emmett and Ms Birch, the moderation in the national accounts’ measure of wages was the most surprising aspect of the latest report.

“Growth in average non-farm earnings per hour (the RBA’s preferred measure of broader labour costs) was flat in the quarter, leaving annual growth at just 2.9 per cent,” they said.

“This is lower than the business indicators measure of wages suggested, and much lower than the RBA’s forecast of 4.7 per cent. While this series is volatile and prone to revisions, it suggests that business liaison on wages is overstating growth in labour costs.”

The ANZ senior economists noted that inflation measures in the national accounts moderated but only slightly, with the household consumption deflator rising by 1.5 per cent in the December quarter compared to 2.1 per cent in the September quarter. 

They also pointed out that the core household consumption deflator increased by 6.2 per cent in annual terms, which was the biggest lift since June 1990.

“While these data are now dated, and don’t fully reflect the impact of the 325 bp of cash rate increases since May 2022, they show inflationary pressures and growth have likely peaked,” Ms Emmett and Ms Birch said.

“While more timely data will dominate the RBA’s consideration around interest rates, the data raise the risk the RBA may feel able to pause in its tightening cycle earlier than we currently expect.”

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.