Growth, inflation and labour market all easing
A strong rebound in activity as lockdowns end.
Q4 GDP rose by 3.4% q/q (4.2% y/y), broadly in line with our estimate of 3.5%. Household consumption drove the result as lockdowns eased in Q4 with both goods and services spending increasing by over 6%, which saw overall consumption more than recover the Q3 fall and exceed pre-COVID levels for the first time. The production side of the accounts and data for the states also reflect the impact of easing lockdowns in NSW and Vic, with the services industries seeing large gains in the quarter. The domestic final demand and consumption deflators strengthened, reflecting the price pressures seen in other data (albeit these measures are volatile and affected by compositional changes). On the labour costs side, AENA per hour has been buffeted by swings in hours worked but continues to track above the WPI in year-ended terms, though the more volatile unit labour costs measure fell in the quarter.
Today’s release doesn’t alter our expectations for growth going forward, with Q1 to be impacted by Omicron early in the quarter but signs suggest activity has already rebounded. We continue to see growth of around 3.5% over 2022, and closer to trend growth of around 2.1% in 2023. With GDP now above pre-COVID levels and activity to remain healthy through 2022, the focus for the RBA will continue to be on the nominal side. We expect unemployment to fall to around 3.5% by mid-2022 and wage growth to pick up, with the RBA having enough evidence that inflation is sustainably within the target band to begin normalising rates in the second half of 2022.
In terms of today’s release, the data show a strong rebound in activity as lockdowns ended in the two largest states. The expenditure side was driven by a strong increase in household consumption, contributing 3.2ppts to growth. Business and dwelling investment as well as net exports made small subtractions, which were offset by a solid contribution from inventories. Government spending was also slightly softer after a very strong rise in the previous quarter. The impact of the removals of lockdowns was evident with NSW and Vic seeing the largest increases in state final demand, while on the production side the household services industries led the gains by industry.
The impact of both price pressures and supply constraints was evident in today’s accounts. The domestic final demand deflator continued to strengthen as did the consumption deflator. Measures of labour costs were mixed, with average earnings continuing to track just above 3% while unit labour costs softened slightly. Supply constraints were particularly evident in dwelling construction which saw large declines in all states other than NSW & the ACT.
Of note was a large fall in the savings rate following a spike in Q3. The decline was driven by a fall in household income as government support payments pulled back, as well as increased consumption. Nonetheless, the savings rate remains elevated at 14% and households have accumulated a large stock of savings through the pandemic. Pent-up demand for discretionary spending was evident in today’s data, signalling households will continue to spend in 2022.
Looking forward, we expect to see growth slow in Q1 with Omicron impacting early in the quarter, although high frequency indicators suggest the hit was not as large as initially feared and activity has already rebounded. We see growth continuing at an above trend rate in 2022 supported by elevated household consumption and rising dwelling and business investment. Government spending is also expected to provide support. Overall, that sees growth of around 3.5% in 2022 before closer to trend growth in 2023. That said, while aggregate GDP is now notably above pre-COVID levels, a number of pandemic impacts remain including elevated goods spending and lagging services trade. The extent to which these imbalances normalise, and how quickly, will only become apparent as 2022 goes on.
Find out more in the NAB Australian GDP Q4 2021 Report
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