Overview

GDP rose by 0.8% q/q (3.3% y/y), a fairly solid result considering the disruptions to domestic activity in early 2022, following the strong pickup in Q4. Today’s data shows that goods consumption remains elevated despite the continued recovery in services spending. It also confirms that services trade remained depressed despite both state and international borders opening in the quarter – but larger gains will likely occur in Q2. The impact that supply chain disruptions may have on growth this year also remains evident, with both dwelling and business investment constrained by the price and availability of materials. Today’s release doesn’t alter our view for growth over 2022 – which is expected to remain strong at over 3.0% before moderating in 2023. It also doesn’t alter our view on monetary policy, with the exceptionally easy stance of policy amidst a tightening labour market and pickup in domestic pressures the key focus. That said, the high level of savings will help households weather the headwinds from higher rates and rising prices in the near term. 

In terms of today’s release, the data show ongoing strength in household consumption despite the headwinds from Omicron and floods and comes after a very strong rise in Q4. Elsewhere on the expenditure side outcomes were more mixed. Government spending was strong, driven by both consumption and investment while dwelling investment was slightly weaker after being constrained on the supply side. Business investment was mixed with M&E stronger, but buildings & structures softer. By industry, recreational, transport & postal and hospitality led the gains reflecting a recovery in services as the impact of lockdowns fade. Professional services also made a notable contribution in the quarter while weather impacted agriculture, forestry & fishery which was weaker following a strong outcome in Q4.

The impact of both price pressures and supply constraints were again evident in today’s accounts. The domestic final demand and consumption deflators strengthened further – with DFD at its highest level since the early 2000s in annual terms. Measures of labour costs were mixed, with average earnings per head softer while average earnings per hour was significantly stronger, but likely impacted by the volatility in hours worked. Overall, unit labour costs rose slightly but were broadly flat over the previous 6 months.

Of note was the strong rise in the terms of trade in the quarter, now at a record high – and impressive in the context of the strong price growth on the imports side. This reflects the strength in prices of a number of Australia’s key commodities and will support national income but is unlikely to see a significant response in terms of mining investment in the near term. Ultimately, higher energy and petrol costs for households will likely have a more direct impact via a reduction in consumption as household budgets are stretched.

Looking forward, we expect solid growth to continue in the near-term, in part supported by strong consumption as the household savings rate normalises. Business investment should also pick up, while dwelling investment and public demand are expected to remain elevated. That sees GDP growth of over 3.0% this year before growth slows to around 2.1% over 2023 and 2.25% in 2024. With lockdowns now in the past, and with state and international borders open, we expect the balance between goods and services consumption to normalise and for services trade to lift. However, the timing and pace of the normalisation in these components remains highly uncertain. Ultimately, we still see the high level of aggregate demand putting further pressure on what is already a tight labour market and, with inflation elevated, expect the RBA to continue normalising policy.

For further details please see the NAB Australian Economic Update (GDP Q1 2022)