Economic resilience comes from many places, and while it may be hard to fathom, the Australian economy continues to sweep the corners of its economic potential, to deliver economic growth while around the world, major economies rush headlong toward recessions. The September quarter saw Australia’s economic growth at 0.6%, feeding into annual growth of 5.9%.
Despite significant international headwinds, some have argued they are as universal as at any time in history, the Australian economy remained in positive territory for the fourth consecutive quarter of economic growth since the contraction in September quarter 2021 due to COVID 19.
Overall, the economy at $2.18 trillion year-ending September was back on trend with pre-COVID growth.
Beyond the headlines, the challenge for the economy is where the economic growth has come from and the implications. The major contribution to growth came from household consumption, which contributed 0.6% of the quarterly growth, with most other contributions subdued or negative.
To be explicit, net-net, all the economic growth in the September quarter came from household expenditure. As Shane Wright wrote in The Age in early December, the population appears to have ignored ramping inflation and the guidance from the RBA and lent into its cash reserves to fund its lifestyle choices.
We can see the contributions to GDP below.
On a straight spending basis, Household Final Consumption Expenditure grew 1.1% and has lifted (as Wright put it) “…a stonkingly good 11.8 per cent over the last twelve months.”
Analysis of the detailed data shows households spent more on Non-essentials than Essentials.
Discretionary spending on such items as hotels, cafes and restaurants was up 5.5%, transport services covering domestic and international tourism was up 13.9%. Also reflecting improvement in supply chains, purchase of vehicles was up 10.1% as back orders started to be filled.
Most of this household spending is being funded by a reduction in household savings. In the September quarter, household savings as a proportion of net disposable income was 6.9%, well below the peak of 23.5% in June 2020. Still, as the AFR’s John Kehoe pointed out, that’s about $A260 billion more than pre-Covid levels.
Though it isn’t often discussed, the reality for many households is they put their planned expenditure on hold and banked the holiday cash (for example) for better times. Those times have come and with pre-payments for airfares, accommodation, restaurant expenditure and the like, we can imagine the September and December quarters will both be huge. Households were not saving for a rainy day of heavy inflation, they were saving from a break from the drab experiences of the last almost three years.
Looking to the future, the contribution from household expenditure is likely to reduce as available savings diminish and the impact of interest rate rises flows through.
At this stage in the rates cycle just 0.75% points in the RBA increase in the official cash rate was felt by consumers in the September quarter. With the increase of a further 0.25% to take the cash rate to 3.10% there is still 2.75% points to be felt by mortgage holders in coming quarters.
The outlook for household contributions to economic growth is pretty grim, with the economy slated to grow quite slowly in 2023, (forecast to be just 1.4% in 2023 as the AFR’s Ronald Mizen points out).
Another relevant factor has been that wages finally started to move. Wages share of total factor income lifted to 50.2% up from 48.8% in the June Quarter. Compensation of employees was up 10% year-on-year and compensation per employee was up 4.8% year-on-year. That is welcome, but wages share is essentially still at or around its lowest ever proportion of total income. It is pretty difficult to ask households to carry a big share of economic growth and expansion, without the capacity to do that increasing.
A moderating factor to concern about the future of economic growth is provided from a different perspective, Ronald Mizen in the AFR suggests that mining profits in recent years have over-inflated the profit share. The graph below separates out mining and non-mining wages and profits and when considered on this basis, according to Mizen, the data shows non-mining wages (dark blue line) surged to near-decade highs in the September quarter, while non mining profits slumped (red line).
The fault line in this approach is that you cannot carve the economy up into segments for convenience of making an argument. Australia has one economy and sure it has pieces, but when we discuss the role, all households play in sustaining economic growth and the impact of wages, we do need to look at all wages and all profits. Carving out the mining companies (as Mizen does) denies the role that finance sectors, materials suppliers, construction companies and even government regulators play in making that corner of the sector successful. We might be better placed consigning the ‘mining is different’ argument to the dustbin of irrelevance in an integrated national economy where it takes us all to tango.
Still, maybe the different wage and profit share trajectories of different sectors of the economy is correct, and it will certainly be food for thought, or perhaps just confirmation of the old adage that there are “lies, damned lies and statistics”.
Meantime, hang on tight for 2023. As inflation bites and household savings dwindle, future economic growth may look a lot less rosy!
