GDP rose by 0.9% q/q (3.6% y/y), driven by a good result from household consumption and an impetus from trade. This data largely predates the rapid series of rate hikes in recent months, but showed an ongoing normalization in the household savings rate – which will likely decline further as rates rise. Spending on services has continued to recover while spending on some categories of goods has slowed, reflecting further rebalancing – and we expect this momentum to continue. Average Hourly Earnings (AENA) have moderated due to a rebound in hours worked, but in annual terms they continue to sit well above the WPI measure of wage growth, indicating pressures growing domestic inflationary. Unit labor cost growth also accelerated during the quarter. Overall, the accounts suggest that the economy was in good shape at the start of the monetary policy tightening phase, but that does not change our view that growth will slow to below trend in 2023 and 2024. Implications for monetary policy are also limited, with the RBA likely. to raise rates further in the coming months with high inflation and higher frequency data indicating continued strength in spending and the labor market at the start of the third quarter.
Today’s release reflects many moving elements, including a rebound from a COVID impacted first quarter, weather and supply impacts on construction, the ongoing recovery in services spending and normalization business models. On the expenditure side, the results were largely in line with expectations, with consumption of services driving the 2.5% increase in expenditure, while consumption of goods remained at a relatively high level. . Trade made a significant contribution after imports fell sharply in the first quarter, while government spending remained elevated and housing investment fell due to weather-related disruptions and supply constraints. By industry, gains came from travel, hospitality and arts and recreation – reflecting the rebound in household spending in these sectors after an Omicron impacted the first quarter and the ongoing post-pandemic recovery more broadly. .
The nominal part of the accounts continued to reflect a general build-up of price pressures, with a consumption deflator up 1.5% q/q and an overall domestic final demand deflator up 1.6% q/q. Both track very high rates in annual terms at 3.7% and 4.9%, respectively. Average earnings growth was volatile in the quarter, but continues to sit well above the WPI in annual terms. Importantly for domestic inflationary pressure, unit labor cost growth accelerated in quarterly terms and continues to exceed pre-pandemic rates. Strong terms of trade also continue to support income growth in the broader economy.
Looking forward, We expect growth to continue at a slower pace as we move past the rebound from containment measures and rising prices and interest rates begin to weigh on households and the wider economy. Overall, we expect growth to slow to below trend over the next two years. The key dynamics in a national accounts sense will be the continued rebalancing of spending from still high goods to services, the ongoing recovery in services trade, and the overall impact on household savings and income as rates increase. Growth in average wages and growth in unit labor costs will also become important given their implications for price pressures. We expect the slowdown in growth to eventually trickle down to the labor market, with the unemployment rate rising over the next couple of years, but remaining close to full employment overall. This sees wages and domestic inflationary pressures continue to strengthen as the impact of international factors begins to fade.
For more details, please see NAB’s Australian Economic Update (GDP Q2 2022)