Download the PDF
Where will the winds of relief come from?
Recent weeks have seen the release of national accounts data from major developed economies and for the most part, the outturns have been good. Overnight we received the news that US real GDP growth for the June quarter had been revised up to a robust 3% quarterly annualised rate. In Europe, both the UK and euro area recorded their second quarter of solid growth after a period of malaise in 2023 and Japan's economy bounced back strongly from a contraction in the first quarter of the year.
Next week, we will receive the same data for Australia, however we are not expecting the news to be quite so cheery. Economic momentum in Australia has been waning for some time now, with quarterly growth in real GDP falling to 0.1% in the March quarter, as the impacts of elevated inflation and tight monetary policy reverberate throughout the economy.
This thematic continued into the June quarter, with our current estimate for real GDP growth over the quarter sitting at just 0.2%. As we have highlighted for some time now, the only reason Australia is not in a recession is the significant surge in population growth over the past two years. Per-capita GDP growth has been negative for the last five quarters and the June quarter outturn is likely to make it six, something that has not happened in the history of the series beginning in the early 70s. In fact, if population had only been contributing to growth at its pre-COVID rate, real GDP growth would have been negative over the three quarters to March.
Driving our forecast of another soft GDP print, is continued weakness in consumer spending. We already know from retail sales data that consumers have been cutting back, with sales volumes down 0.3% over the June quarter. While non-retail consumer spending will help to offset these falls, we expect another quarter of muted growth in household consumption. The silver lining is that we expect the June quarter to be the bottom, with households to be supported by a range of factors going forward.
July 1 saw the implementation of the Stage 3 tax cuts, which added to the pay packets of working Australians and are expected to help support spending. However, the impact is not expected to be dramatic or immediate with consumers to spend only a small portion of their increased income in the near term. This is evident in the July retail sales released today, which were flat over the month. Nevertheless, the combination of falling inflation and supportive growth in nominal incomes, will also contribute to growth in real disposable incomes and add support to spending.
Given the large share of GDP encompassed by consumer spending, improvement in this sector will see GDP growth also begin to improve over the second half of the year. However, the recovery in growth will be gradual with other sectors of the economy still under pressure from higher interest rates. Data released this week indicates that business investment was weaker than we had expected in the June quarter, and we now expect it to contribute very minimally to growth over the quarter. While forward looking spending intentions were solid, the contribution to growth made by business investment over the next year will ease.
The housing market is not expected to be any help in the near term either, with the dearth of housing approvals pointing to a weak pipeline of residential construction over the next year, helped only by the backlog of dwellings still to be completed. The housing market continues to suffer from labour shortages and input cost pressures, which along with higher costs of borrowing have made the prospects of building new dwellings unattractive for many.
With so many headwinds to growth, where are the supports? In the short-term support will largely come from the public sector. Both the Federal and State governments have been attempting to provide assistance not only to help economic growth but also for cost-of-living relief. Government investment has been boosted by strong pipelines of infrastructure spending. On top of that, significant subsidies to households, including those for rent and electricity bills will continue to spur growth in government consumption in the second half of the year. The impact of the subsidies on inflation is already evident, with the monthly CPI release for July indicating electricity prices fell by over 6% over the month, with even bigger falls expected in August, as the impacts flow through to all states and territories.
Government support provides a short-term solution for the economy, however a sustained recovery in growth will rely on improving housing market conditions, modest cuts in the cash rate from the RBA, and ongoing growth in real disposable incomes. The good news is that the Australian economy is past the worst of the weakness in growth. The bad news is that the recovery will be tepid, with the economy not expected to return to trend growth for at least a year.