GDP rose by 0.2% q/q (2.3% y/y) – in line with our expectations and a touch softer than market and RBA forecasts (consensus 0.3%). The expenditure side was in line with partials and continues to paint a picture of soft consumption growth and weakening housing construction, with increasing evidence that higher rates and inflation are weighing on spending. The nominal side of the accounts reflected the pattern we have seen in other price data, with the pace of inflation easing in quarterly terms but remaining very high. Broader wage and labour cost measures also continue to track strongly reflecting the tightness in the labour market with the Statistician noting “higher than usual end of year bonuses and incentives paid to workers”.

Today’s release doesn’t change our view that growth will slow sharply through mid-2023 and indeed shows signs that rates are flowing through to softer household spending. We continue to see weak growth through mid-2023 with annual growth of just 0.7% over 2023 and 1.2% over 2024. For the RBA, the national accounts continue to reflect broad based price pressure through strong deflator growth albeit at a slightly softer pace. While volatile on a quarterly basis, nominal unit labour costs continued to grow strongly up 2% q/q and are now tracking near 8% y/y. The evolution of these cost pressures will continue to be important as the RBA seeks to return inflation to target as global pressures fade, but domestic pressures (in services) continue.

• The activity side of the accounts show that activity is continuing to slow, as we move further beyond the rebound phase and interest rates begin to weigh. Household consumption growth edged lower but managed to eke out 0.2% in real terms – supported by spending on essentials, with discretionary falling in the quarter. Both business and government investment were key supports in the quarter while dwelling investment (and ownership transfer costs) continued to fall as higher rates weigh on the housing market.
• The nominal side of the accounts continued to reflect the broad-based inflation pressures in the economy, though both the consumption and DFD deflators continue to ease in quarterly terms. That said, they remain strong at 1.1% and 1.0% q/q, respectively and over 6% y/y. The terms of trade ticked up and remains elevated.
• Broader wage and labour cost growth measures remain high but eased slightly in the quarter. They continue to track at a higher rate than the narrower wage price index measure of wage costs, reflecting the cyclical pressures in the labour market. Importantly for the RBA outlook, unit labour cost growth strengthened in the quarter, up 2% and while volatile is now up 7.9% over the year reflecting weak productivity growth and strong growth in labour costs.
• The savings rate fell further in the quarter, now around 3ppt below pre pandemic levels at 3.7%. Disposable income growth ticked up with labour income growth strengthening and a slightly smaller subtraction from rising interest payments than Q4 (owing to lower rate rises). Nonetheless, the rising interest burden has subtracted around 3.3ppts from disposable income growth over the year.

For further details please see the NAB Australian Economic Update (GDP Q1 2023)