Australia’s economic growth slowed in the March quarter as rising household, business and government spending failed to counter a slump in net exports.
In the first three months of 2022, gross domestic product grew at an annual rate of 3.3%, the Australian Bureau of Statistics said. That eased from the 4.2% annual pace previously reported and from economists’ forecast of around 3%.
The quarterly growth rate was 0.8% to a record $527.7 billion and marked the second consecutive quarter of expansion. Wages rose while several measures of inflation rose, one to the highest in 34 years, stoking fears that the Reserve Bank of Australia will have to raise interest rates faster and sooner to curb inflation.
The pace of GDP growth is expected to slow after the ABS reported on Tuesday that the country’s current account surplus narrowed from $5.7tn to $7.5tn in seasonally adjusted terms for the quarter. , a reduction of 1.7% in overall growth alone.
However, final domestic demand contributed 1.6 percentage points to GDP growth, with households accounting for half. Government spending grew by 0.6 percentage points, driven by additional spending on health and flood relief in New South Wales and Queensland, the ABS said. Businesses, too, added to their stocks.
“Household consumption continued to drive growth this quarter,” said Sean Crick, acting head of national accounts at ABS. “Following the easing of Covid-19 restrictions, household spending on transport services, hotels, cafes and restaurants, and leisure and culture has increased.”
The quarterly GDP figures are the first major economic figures to be released since Albania’s Labor government took office following its May 21 election victory.
The March data provided a snapshot of the momentum in the economy that incoming ministers inherited. It also showed that price pressures were mounting at the start of the year, supporting the case for another hike in official interest rates when the RBA board meets next Tuesday.
New treasurer Jim Chalmers said the figures were a glimpse of the “economic mess” Labor had inherited from the Morrison government.
“Soaring inflation is a big challenge, falling real wages are a big challenge, and the impact of rising interest rates that the Reserve Bank Governor [Philip Low] reported is a big challenge,” he said.
“While some of these numbers on the surface may be pleasant compared to some of the diabolical numbers we’ve had over the past couple of years, they’re still below what the former government was hoping for.”
Australia faces a ‘perfect storm’ in the energy market
Among the deviations from the pre-election budget outlook prepared by the Treasury was a quarterly GDP growth pace of 0.8%, down from 1.8%, Chalmers said. Similarly, new business investment at 1.4% was about half of the 2.7% forecast, while exports fell 0.9% from the 4.2% growth forecast in the outlook.
The emergence of “a perfect storm of conditions and challenges in our energy market” was not captured by Wednesday’s national accounts, Chalmers said, referring to soaring wholesale prices. electricity and gas, which has already forced the introduction of certain market capitalizations. and retailers to refuse customers.
Australia’s economy has shrunk less than many other wealthy countries during the pandemic, and its rebound has also been less dramatic than some. European Union economies, for example, grew 5.1% in the March quarter from a year earlier, and the UK saw an 8.7% jump.
The United States recorded annual growth of 3.6%, although rising interest rates pushed the world’s largest economy into a 1.4% quarter-on-quarter contraction. This fate could spread to other countries as their central banks raise interest rates to curb inflation.
The deflator used by the ABS to correct for price rises 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 increased by 9.6% while the cost of imports increased by 3.5%. Russia’s invasion of Ukraine in February is partly responsible for this, although commodity prices started to rise before then.
For domestic demand, the “price deflator” rose 1.4%, the highest since the introduction of the GST in 2000, reflecting strong demand and rising costs. Headline consumer price inflation of 5.1% reported last month for the March quarter was also at its highest level in two decades..
Employee compensation rose 5.5%, a figure economists will also focus on. Ahead of Wednesday’s data release, ANZ said a 5% pace would keep speculation of a 40 basis point cash rate hike at the June RBA meeting “very much alive.”
Earlier this week, investors were already pricing in a three-in-four chance that the RBA hike will take the cash rate to 0.75% when the board meets on Tuesday.
Household savings fell two percentage points to 11.4%, financing the 1.5% increase in consumer spending. Sally Hunter, senior economist at KPMG, said the ratio remained “comfortably above pre-pandemic levels”.
“Households are still relatively well positioned to weather the emerging headwinds of rising inflation and rising interest rates,” Hunter said. “Notwithstanding that, spending momentum is expected to cool for the rest of the year as these drags combine with the end of the momentum generated by the easing of restrictions.”
Floods in New South Wales and Queensland stifled growth in the construction sector, reducing it to just 0.2% even as governments and companies were busy pumping money into projects in all the countries.
Hunter, however, was wary of over-interpreting growth in workers’ total compensation, noting that it grew at a quarterly pace of 1.8%, less than the 2% pace in the December quarter.
Profits in the mining sector increased by 14.7%, accounting for more than half of all corporate profits.
Among the states, Victoria led final demand growth, ahead of Western Australia, with Tasmania lagging behind.