GDP rose by 0.5% q/q (2.7% y/y) and is now 7.2% above its pre-COVID level. The activity side of the accounts shows that the economy has remained fairly resilient to the interest rate and price pressures through Q4 but that price and cost growth remains elevated and broad-based. The rebalancing of goods versus services spending is now well underway, with the level of goods consumption normalising. Overall, today’s numbers don’t change our view of the economy. From here we expect consumption growth to stall, as the impact of higher rates continues to flow through. There are few implications for the near-term path of monetary policy with the RBA already signalling further increases in coming months. We continue to see the cash rate reaching 4.1% by May, though the strength of Q1 CPI and resilience of high frequency measures of consumer spending will be key.

• The real side of the accounts continue reflect an economy that has rebounded strongly from the pandemic with ongoing resilience of consumer demand. Consumption growth was slightly lower than we had expected with goods spending declining in the quarter (down 1%) as consumption continued to rebalance towards services. Overall, both discretionary and non-discretionary spending continued to rise, suggesting the impact of higher rates has yet to really show through in consumption behaviour.
• The savings rate fell further in the quarter, now around 2ppt below pre pandemic levels at 4.5%, with interest payable continuing to rise sharply in the quarter. The Q4 interest burden does not yet fully reflect the impact of rate rises to date (or those to come). We expect this to be more fully reflected in H1 2023, in line with our view consumption will be flat to negative in 2023.
• Other expenditure components were broadly in line with the partials and suggest that both dwelling and business investment are already responding to higher rates, with both easing despite a large pipeline of work in dwellings and high capacity utilisation in the business sector. Government spending also remains high but made little contribution.
• 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.
• Growth in both the domestic final demand and consumption deflators eased in the quarter but remained high. This is in line with other data sources that suggest we may be past the peak in inflationary pressure. How quickly this pressure moderates will be important for the peak and persistence in interest rates. The ongoing recovery in supply chains amidst slower demand growth in H2 2023 will likely see price pressures ease more significantly.

For further details please see the NAB Australian Economic Update (GDP Q4 2022)