Re-opening of economy drives spending and holds up GDP

The growth in GDP of 0.8 percent was above expectations and a relatively strong result given the partial data released by the ABS earlier in the week. (Albeit a significant decline from the December quarter figure of 3.4 percent).

As foreshadowed in yesterday’s data, continued strength in government and household spending did the heavy lifting, while net exports and dwelling construction were a drag on GDP.

The re-opening of the economy was a major driver of household spending (notwithstanding January and February’s omicron wave), with spending on transport services (+60 percent), recreation and culture (+4.8 percent) and hospitality (+5.3 percent) rebounding sharply, while spending on essentials was broadly flat (-0.2 percent q/q).

The 1.5 percent gain in consumer spending meant that expenditure growth comfortably outpaced income, which drove the savings rate down to 11.4 percent. But this is still comfortably above pre-pandemic levels; households are still relatively well-placed to weather the emerging headwinds, from higher inflation and rising interest rates. Notwithstanding this, momentum in spending is expected to cool through the rest of the year, as these drags combine with the end of the boost generated by the relaxation of restrictions.

The floods in NSW and QLD put a drag on activity particularly in the construction sector, which recorded an anaemic 0.2 percent increase in Gross Value Added (GVA) despite the substantial pipeline of work underway. But they were also a boost to state government spending in NSW and QLD – with defence spending in these states up almost 8 percent on the quarter.

Perhaps surprisingly, there was no significant acceleration in the growth of total compensation in employees (+1.8 percent q/q, after a 2 percent increase in the December quarter). While this broadly confirms the WPI data released last month, the ABS also flagged that hours worked fell over the quarter (due to the omicron wave) – so taking this into account, momentum in earnings is accelerating, but still below price inflation.

The inflationary environment was also highlighted by the ABS data, with the domestic price deflator (an alternative measure of inflation in the economy) rising 1.4 percent on the quarter (the fastest pace since the introduction of the GST). While this partially reflects moves in global commodity prices, particularly fuel, it is also another sign that inflationary pressures are broadening, with businesses now passing through increases in their cost base.

The impact of commodity prices was also evident in mining sector profits, which surged 14.7 percent. Profits in the sector now account for over 50 percent of all corporate profits – the last time this threshold was breached was in 2008, and with prices still elevated this is likely to remain the case in the near term.

Overall then, there were no significant surprises in the release; activity is continuing to climb, with fiscal stimulus still a key driver and inflationary pressures are building through most sectors and states. The data is unlikely to change the RBA’s current course of interest rate rises, and we expect to see a further 0.25 percent point increase on Tuesday.


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