July 2022

GDP Numbers

The Australian economy just keeps surprising. First, it was the resilience displayed through the pandemic. Now it is the height of the bounce as the economy is re-opens. Many overseas economies’ Q1 GDP numbers surprised with weakness. Not Australia.

GDP growth rose by 0.8% in the March quarter (above consensus estimates), and 3.3% over the past year. Consumption by both households and governments was the key driver of spending. Public investment remained strong, and business investment in plant and equipment and intellectual property (notably IT and mining exploration) were also prominent. Firms re-stocking led to a sharp bounce in imports. High commodity prices were a plus for national income growth. Bad weather and material and worker shortages constrained construction spending.

Despite rising inflation pressure, profit margins in many industries remained decent in the quarter (the exceptions were finance, recreation, utilities and accommodation and food services). But ongoing cost pressures will make things more difficult in coming quarters, particularly for firms unable (or unwilling) to pass cost rises onto customers.

How the economy compares to pre-COVID times

Most areas of spending are now higher than they were pre-pandemic. The exceptions are the volume of exports (held back by various weather events and weak global growth) and construction (weather and material and worker shortages). But even in these areas of weaker spending, there are signs of strength. The prices received for exports relative to imports (the terms of trade) are at a record high (Australia has received a significant income boost from the rest of the world paying up for our exports). And the pipeline of work to be done (particularly for standalone houses) is at a very high level.

About 70% of sectors are now larger than they were pre-pandemic. The exceptions are transport (notably air and rail due to closed borders and working from home) and some utility sectors. Sectors that have done well over the past couple of years include agriculture (good growing seasons and strong demand), computer services (increasing investment in digitisation, working from home, online shopping), wholesale and retail trade, government and some areas of manufacturing.

Outlook

The indicators to date show consumers remain happy to spend. The labour market is strong, wage growth is rising, many households are sitting on a mountain of saving and their wealth has risen substantially over recent years. There is plenty of residential construction work still in the pipeline. Firms have indicated that CAPEX budgets will rise strongly next financial year, and this follows a very strong rise this financial year. And there is so much infrastructure work still to be done that the NSW Government is looking to delay some projects. While manufacturers appear to have got their inventories in better balance, further restocking is likely in both the retail and wholesale trade sectors.

But there are risks

The global backdrop is mixed. High inflation and potential energy constraints have led to cuts to GDP growth estimates, particularly for Europe and Japan. Things could get particularly tough if Russia stop energy exports more widely to Europe. The Chinese economy is struggling as it fights COVID and attempts to reduce debt (particularly in its construction sector). The Chinese Government is increasing both fiscal and monetary support. But there is only so much that can be done if much of the economy re-enters lockdown. The US economy is doing very well, although the Federal Reserve is currently embarking on an aggressive monetary tightening cycle.

Not what we had in mind

An economy with a 3.9% unemployment rate is one that is doing pretty well. And there are good reasons to think that the economy will remain in reasonable nick, at least for the next 12-18 months. But there are a number of clearly identifiable risks.

Years ago, the Swedish rock band The Hellacopters sang, “it ain’t quite what I pictured, it ain’t quite what I had in mind.” They were singing about life. But that is also the theme of this economic recovery, one that has strong economic growth, a very low unemployment rate but high inflation and low wages growth. Hopefully, the economy will turn more ‘normal’ over the next 1-2 years. But it is possible that the new ‘normal’ is not the one that most of us have in mind.