Building a Sustainable Future: Economic Update

May 5, 2023

We found out recently that GDP grew by 0.5% in the December quarter. This was the slowest pace of growth since September quarter 2021, a time when both Sydney and Melbourne were in COVID lockdown. That pace is a little under the average quarterly growth rate of 0.6%.

Slowing in the pace of economic growth is consistent with the wider evidence. The growth of credit, new orders, job vacancies and retail trade (adjusted for inflation) all took a step down in the December quarter. The unemployment rate was reported to have risen. The slowing in economic momentum was put down to the rising cost of living and increasing interest rates. Flooding played a role. Worker and material shortages acted to constrain the growth rate (and push up inflation).

But the economy may have been performing better than the reported growth rate. The pace of new orders slowed but remained above its long-term average. Worker shortages remained firms’ biggest constraint, the lack of orders was far less of a concern for most. Household spending grew strongest in discretionary areas such as recreation and accommodation and food services. Capex intentions remain firm.

The second half of last year was a step down from the first half. The impact of higher interest rates and cost of living concerns and will see this half year weaker again although growth rates could still be OK (close to average quarterly growth rates). The second half of this year will be below-par. The first half of next year could be weaker again.

There are risks both ways around that view. Consumer spending could decline quicker than I anticipate as indebted households struggle with rising mortgage rates, cost of living concerns and falling house prices. Australian economic data has tended to be weaker than forecast over recent weeks. But the global economy has started the year in better shape than most analysts had anticipated. And tough competition has meant that the mortgage rate has risen by less than the cash rate.

The RBA calculated that non-farm average earnings per hour grew by only 2.5% in the year to the December quarter. That suggests that wages growth is not a cause of the current inflation concerns. The GDP data indicates that the rate of consumer inflation is less than what is taking place in the wider economy. Profit margins have risen across a number of sectors of the economy although they were only comfortably above normal levels in a few sectors (notably mining).

The combination of average GDP growth and strong increase in hours worked implies a very weak productivity performance (growth in GDP per hour worked was at its weakest since September 1986). That could reflect a tight labour market pulling in inexperienced workers that take time to develop skills for their new job. It is also likely to reflect that temporary factors (such as flooding) held back production. More concerning for the future of productivity growth was that by my calculation consumption reached its highest ever proportion of economic activity.