Market Musings: Australia GDP: growth vs levels
The dated Q2 Australian GDP confirmed what we should have already known. The growth pulse is subdued with higher interest rates and cost of living squeeze working to constrain consumer spending, construction, and broader business investment. The Australian economy expanded by just 0.2% in Q2, lowering the annual run-rate to a meagre 1%pa (chart 1). Outside of COVID this is the slowest annual pace since the early-1990’s recession with household consumption particularly weak despite the ongoing drawdown of COVID-era ‘excess savings’ (chart 2).
Indeed, slicing and dicing the data further shows that growth across the private sector has stalled with strength in government spending and a surging population somewhat holding up aggregate demand (chart 3). The population mirage is a key factor that has helped keep the economy from tipping back into ‘technical recession’, as it did in the years before COVID. GDP is a volume measure, so a bigger population helps mask the pain being felt individually. In per capita terms things continue to go backwards. GDP per capita fell for the 6th straight quarter. On our figuring this is something that hasn’t occurred since at least the early 1970’s.
Looking ahead, subpar momentum, especially across the goods-producing and interest rate sensitive sectors, looks set to continue for another quarter or two. This is the signal coming from our forward-looking ‘private demand tracker’ (chart 4). But without a new shock, we believe Q2 may mark the cycle low for annual growth based on the income support that has started to flow from the stage 3 tax cuts and other relief measures, with real wages turning course because of the step down in inflation, and the tentative signs of life in a few other areas.
The deceleration in growth stemming from the RBA’s ‘restrictive’ policy settings is aimed at rebalancing the economy and gradually cooling the labour market. Based on the tepid growth, and lags in the jobs market (i.e. the unemployment rate today is more of a reflection of how things were tracking across the economy ~6-months ago), a further uptick in unemployment is anticipated (chart 5). This is the unfortunate price that needs to be paid to definitively tame inflation. However, until that manifests more clearly, we doubt the RBA will pivot away from its ‘hawkish’ underlying tone. While economic growth rates get market and media attention, for the RBA the level of activity, especially compared to supply, is what is important. This is what influences inflation. And there is a mismatch here with the larger population, coupled with high levels of activity in public demand as well as across the labor-intensive services sectors still in place (chart 6).
Australia’s still ‘positive output gap’ can be observed in the low level of unemployment, high employment to population ratio, and/or other metrics such as above average capacity utilization. This is in turn keeping domestic inflation stickier than in other nations. Unit labour costs and domestic demand deflators contained in the Q2 national accounts moderated but they are still north of the pulse consistent with the RBA’s inflation target band (chart 7). This is a reason why the RBA has been noting interest rate cuts appear unlikely in the near-term despite the pressures in parts of the economy, and why we continue to believe the RBA could lag its global counterparts in terms of when it starts to cut rates and how far it goes during the easing cycle. As the burst of volatility that has rippled through markets over the past 24hrs settles down, we think the diverging policy outlooks between the RBA and others should be AUD supportive on crosses like AUD/EUR, AUD/CAD, AUD/GBP, and AUD/NZD where their respective central banks have already started to lower rates (chart 8).
Peter Dragicevich
Currency Strategist - APAC
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