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National Accounts: slow zone

We no longer need to talk about predictions of slower economic growth as last week’s National Accounts confirmed that we are already in the slow growth zone. 

Real GDP increased by 0.5% in the December quarter of 2022, and 2.7% growth over the year. This increase was driven primarily by net trade (specifically a large fall in imports) while consumer spending and business investment softened – a sign that interest rates have started to bite.  

Interest rate rises and inflation are taking a toll as consumer spending grew by only 0.3% over the quarter, substantially weaker than previous quarters. Though wages continued to grow over the quarter, it wasn’t enough to combat higher mortgage payments and continuing price pressures as household disposable income fell in both real (down 2.2%) and nominal terms (down 0.7%).  

As a result, consumers are saving a much lower share of income, with the household saving rate falling from 7.1% in the September quarter to 4.5%, the lowest level since September 2017. 

Source: ABS National Accounts

With another 25 basis point cash rate increase announced by the RBA today, it’s clear that households will be grappling with these pressures for a while. The combined impact of rising interest rates, inflation and increasing taxes through bracket creep will continue to force many households to cut back on spending, especially as 800,000 fixed term mortgages are set to end through 2023.

On top of slowing consumer spending, private housing and business investment both declined over the December quarter.  Total dwelling activity fell 0.9% as alterations and additions fell by 4.2% with many HomeBuilder projects finishing up. Ownership transfer costs also fell in the December quarter, hit by declining property prices and a falling number of house transfers. 

Business investment fell for the first time since the start of the pandemic (down 1.4% over the quarter), as non-dwelling construction projects also finished up. Changes in inventories also declined, reflecting the softening of imports after existing stockpiles of inventory accumulated over 2022. 

In an otherwise weak report, there were some positives. Net trade was the largest contributor to growth, with imports falling 4.3% over the quarter while exports increased 1.1%. The rise in exports was largely driven by the recovery of tourism and education services, while goods exports fell (with some exports impacted by floods late last year). 

Goods imports took a large tumble (down 3.8% over the quarter) while service imports (largely Australians holidaying overseas) declined for the first time since September 2021, as Australians preferred cheaper, shorter, and closer holidays. 

Chart 2 shows that the net trade result kept the Australian economy in the black at the end of 2022. The risk is that the weakness in local private demand continues well into 2023

Source: ABS National Accounts 

 This blog was co-authored by Michelle Shi, an Analyst in the Deloitte Access Economics team.