Overview

GDP rose by 0.9% q/q (3.6% y/y), driven by a solid outcome for household consumption and a boost from trade. These data largely pre-date the rapid series of rate rises over recent months but did show an ongoing normalisation in the household saving rate – which will likely decline further as rates rise. Services spending continued to recover while spending in some goods categories moderated, reflecting further rebalancing – and we expect this dynamic to continue to play out. Average earnings per hour (AENA) moderated due to a rebound in hours worked, but in annual terms continues to track well above the WPI measure of wages growth, pointing to growing domestic inflation pressures. Unit labour costs growth also accelerated in the quarter. Overall, the accounts suggest the economy was in strong shape entering the tightening phase of monetary policy but this doesn’t alter our view that growth will slow to below trend in both 2023 and 2024. Implications for monetary policy are also limited with the RBA likely to increase rates further in coming months with inflation high and higher frequency data pointing to ongoing strength in spending and the labour market in early Q3.

Today’s release reflects many moving parts including a rebound from a COVID impacted Q1, weather and supply impacts on construction, the ongoing recovery in services spending and normalising trade patterns. The expenditure side printed largely as expected with services consumption driving the 2.5% increase in spending while goods consumption held at a relatively high level. Trade made a significant contribution following the large detraction from imports in Q1 while government spending remained high and dwelling investment fell on weather-related disruptions and supply constraints. By industry, the gains came through travel, accommodation, and arts & rec – reflecting the rebound in household spending in these sectors after an Omicron impacted Q1 and the ongoing recovery from the pandemic more broadly.

The nominal side of the accounts continued to reflect a broad-based build-up of price pressures, with the consumption deflator up 1.5% q/q and overall domestic final demand deflator growing 1.6% q/q. Both are tracking at very high rates in annual terms at 3.7% and 4.9%, respectively. Average earnings growth was volatile in the quarter but continues to track well above the WPI in annual terms. Importantly for domestic inflationary pressure, unit labour cost growth accelerated in quarterly terms and continues to track above pre-pandemic rates. The strength in the terms of trade also continues to support income growth in the economy more broadly.

Looking forward, we expect growth to continue at a slower rate as we move further past the rebound from lockdowns and as higher prices and interest rates start to weigh on households and the economy more broadly. Overall, we see growth slowing to be below trend over the next two years. Key dynamics in a national accounting sense will be the further rebalancing of spending from still-elevated goods to services, the ongoing recovery in services trade and the overall impact on household savings and income as rates rise. Average earnings growth and unit labour cost growth will also grow in importance given their implications for price pressures. We expect the slower growth to eventually feed through to the labour market with the unemployment rate drifting up over the next two years but remaining broadly around full employment. That sees wage and domestic inflationary pressure continue to build as the impact of international factors begins to wane.

For further details please see the NAB Australian Economic Update (GDP Q2 2022)