Last week showed that real GDP in the September quarter expanded by a tepid 0.3% q/q, and a meagre 0.8% y/y.
This was below consensus expectations of 0.5% for the quarter, albeit a very slight improvement on the Q2 growth rate of 0.2%.
The year-on-year growth rate is well below Australia’s long run trend and the weakest since the COVID lockdown in 2020. Excluding COVID, it is the slowest year-on-year growth rate since the 1991 recession.
This very weak growth pulse highlights the need for interest rate cuts, but as discussed last week, this is difficult for the RBA to deliver given that inflation remains uncomfortably high.
The Details - Weak Household Consumption and Weak Private Investment
The largest segment of the economy - the household sector, was again weak in the September quarter. Real consumption was flat (0.0% q/q) and only +0.4% y/y).
The Q3 consumption data points to no recovery so far since the July 1 tax cuts. However, the more recent lift in retail sales suggests better momentum, as households start to spend some of their tax windfall (see figure 8). Essentials weakened in the September quarter (-0.1% q/q, 1.5% y/y), while discretionary spending remains very weak (0.1% q/q, -1.1% y/y).
Elsewhere, business investment weakened sharply, (-0.2% q/q, 1.8% y/y). Industry and mining capex slid again (-2.3% q/q, -10.3% y/y), while non-mining was mixed (0.0% q/q, 5.4% y/y). Dwelling investment recorded a surprise increase, albeit from a weak base. Dwelling investment rebounded (1.2% q/q, -0.5% y/y), while the deflator (construction cost inflation) is still growing strongly (5.6% y/y) despite tepid investment growth.
Overall, real private demand remains very weak, at 0.1% q/q and 0.7% y/y. National accounts-based company profits fell by -1.5% q/q and remain weak at only +0.8% y/y. This is similar to the story seen in listed company profits in FY24, despite the share market’s buoyancy over the past year.
Economy Over-Reliant on Government Spending
In contrast to weak private sector growth, public demand continues to boom and is accounting for virtually all the growth in the economy for the quarter and the year.
Nominal public demand surged (3.1% q/q, 8.3% y/y), and is very strong (1.1% q/q, 4.1% y/y), in real terms. Public demand as a share of the economy has surged to a near record high at 28.8%, which is also boosting inflationary pressure across the broader economy.
As we discussed last week, record public sector spending is also keeping the labour market tight and helping to keep inflation sticky. This is in turn making the RBA reluctant to cut interest rates.
The Per Capita “Recession” Continues
Also noteworthy was that the economy recorded its seventh consecutive quarterly contraction in per capita growth terms (and eighth quarter out of the last nine). Since Q2 2022, GDP per capita is 2.2% lower. Productivity was again very weak in the quarter. This combination of falling per capita GDP and weak productivity has driven a decline in living standards. Real net disposable income per capita has fallen in five out of the last six quarters.
Compensation of employees fell in line with weak productivity, taking pressure off unit labour costs, but making it more difficult for household budgets. The savings ratio edged higher to around 3%.
National accounts confirm inflation is receding but slowly
National accounts-based measures of inflation are finally slowing. The consumption deflator was less sticky (0.7% q/q, 3.6% y/y), but remains more stubborn than the rapidly slowing headline CPI (0.2% q/q, 2.8% y/y), with the latter lowered by government subsidies. However, the public demand deflator lifted ~4% y/y. This public sector-driven inflation has been spilling over into broader wages and CPI inflation.
In summary, the September quarter national accounts reinforce that the economy remains over-reliant on public sector spending alongside heightened population growth (masking very weak per capita trends). Linked to these unbalanced and unsustainable growth drivers is the fact that the economy is also suffering from a significant productivity slump.
What’s the Good News?
From a cyclical perspective, we see scope for some modest improvement to growth in CY25 due to several factors. These include incremental improvement in consumption from the impact of the July tax cuts (evident in October retail sales data), as well as more “pre-election” government stimulus and the (eventual) impact of two to three rate cuts as we move through 2025.
However, beyond this modest cyclical up-tick in growth (to around 2%), the Australian economy’s growth drivers will need to fundamentally change if we are to see better economic outcomes over the medium to longer-term.
The economy needs less government spending and more private sector spending/investment, more thoughtful regulation/de-regulation and stronger productivity outcomes.
As we have discussed previously, the local sharemarket is at risk from over-optimistic valuations relative to the tepid growth outlook. We continue to focus on companies with company specific growth drivers (often global). Asset classes such as domestic private credit look attractive, given the constrained but relatively benign macro-backdrop.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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