Australia’s June quarter GDP released in September, continued to show solid recovery from the COVID 19 pandemic was a solid 0.9%, with quarterly seasonally adjusted growth of +0.9% with combined annual growth of +3.6%. The solid and largely anticipated growth numbers came as the OECD downgraded global growth forecasts, underscoring the challenges in retaining solid economic growth over the next few years.
The big contributors to growth were led by household consumption (+1.1%). This included household consumption in travel related categories such as transport services were up 37.3% and hotels, cafes and restaurants were up 8.8%.
Net trade (+1.0%) reflected booming commodity prices, with exports up 1.1%, slightly offset by Imports -0.1%.
Significantly, and logically, given wages growth is still running at less than inflation, household consumption in the June quarter was driven by a further reduction in household savings, with the ratio to GDP coming in at 8.7%. That represents a decline from the peak of 19.8%, recorded in the September quarter of 2021.
Household savings are not a magic pudding, so expect to see household consumption be wound back as families defend their war chests.
However, reflecting uncertain times and the natural conservatism of the ‘long view’, business investment remained mixed, with positive contributions to growth coming from machinery and equipment purchases contributing 0.2%, but engineering construction falling by the same amount.
Significantly for the forestry, timber and wood products industry, dwelling investment was down -4.6% for the year, reflecting a negative contribution to GDP of -0.1% for the June quarter.
Perhaps the biggest overhanging issue for the June quarter’s GDP data is it lags and does not pick up the impact of the interest rate tightening cycle, which commenced in May. We will have to wait for the September quarter data to be released in early December, to see the full impact on GDP.
The good news right now, is the June data shows the economy has now bounced back to be on the same trajectory – but just below – the pre-COVID trajectory.
Despite the apparent strength in Australian economic growth, the situation in the global economy is nothing like as robust, with global inflationary pressures and ongoing uncertainty resulting from the war in Ukraine has put a dent in expectations of global growth.
The OECD’s six-month economic outlook, released in September, provides some useful insight.
Global growth will fall to 2.2% in 2023, down -0.6% on the OECD’s June forecast. The OECD’s expectation for Australia is 2023 growth of +2.0% which is -0.5% lower than the June forecast as the table below shows.
As Ronald Mizen observed in the Australian Financial Review, wealthiest nations will experience the sharpest declines and the softest economic growth overall, while Asia’s major economies will lead economic growth. Importantly, China at 4.7%, Indonesia at 4.8% and India at a huge 5.7% will deliver economic growth that helps support Australia’s export profile.
Table 1. OECD Interim Economic Outlook GDP projections September 2022
Real GDP growth, year-on-year, per cent
As the table shows, in general the OECD forecasts positive global growth, but the forecasts are now universally being rounded down.
Many commentors have suggested this ‘soft’ landing will require a fine balancing act between central banks like the RBA increasing interest rates to dampen inflation, while doing so at a pace at which economies can adjust.
It seems clear the RBA in particular will need to watch its hand on interest rates. An over-cooking of costs on households could see a whiplash effect, especially if wages continue to be well below the cost of living.
