Slowest economic growth since 90s recession
In the June quarter of 2024, Australia’s real GDP growth rate fell to a lowly 1.0% p.a.
Excluding the pandemic, this marks the slowest sustained period of growth since the early 1990s recession.
While all forecasters expect this is the nadir, they offer different shapes for the recovery path. The RBA expects growth will be 2.3% in 2024-25; Treasury 2.0%.
International agencies are more pessimistic, pointing to Australia’s stubbornly persistent inflation as a drag on the likelihood of a prompt recovery to trend.
Inflation continues to fall but not there yet
Inflation continued to fall in the September quarter, but it’s too early to consider being fully under control.
Even though Headline CPI is within the target band, Trimmed Mean – which offers a better reading of underlying inflation – was 3.5%. The Producer Price Index (for industrial prices) also sits at a high 3.8%.
While household energy subsidies in the 2024-25 budget reduced headline CPI, these alternate measures show inflation remains above the target band.
Inflation forecasts vary, based on differing views of the effect of energy subsidies and labour market outcomes.
Investment levels to slow in 2024-25
New data shows business investment levels will continue to slow in the coming financial year.
Following the pandemic there was an investment boom, with real private business investment levels surging by 7.2% in the 2022-23 financial year.
As the economy has slowed, so too has business investment, with the growth rate easing to just 3.3% in 2023-24.
Forecasts anticipate a further slowdown due to weak business conditions, with expectations ranging from 1 to 2% growth in business investment across 2024-25.
Market sectors face steeper slowdown
Market sectors are experiencing a more pronounced economic slowdown than non-market.
Growth in total industry value-add slumped to 0.9% p.a. in the June quarter. Non-market (government-connected) sector growth was a healthy 3.2%, compared to only 0.4% in market sector industries.
Several industrial sectors – wholesale trade, mining, construction and manufacturing – were especially weak, either reporting flat or contracting output.
This indicates that business conditions are poorer than the headline figures suggest, and about half of the current weak rate of growth can be attributed to government stimulus.
Household spending starts to recover
Household spending started to recover in the September quarter after two years of steady decline.
Both non-discretionary (6.9%) and discretionary (2.7%) spending grew in real terms during the quarter.
The result for discretionary spending is particularly significant, as it follows six quarters of flat or contracting spending.
This recovery is likely due to the fall in consumer inflation, which is now lower than wages growth and increasing real wages, boosting consumer confidence.
Government household subsidies and income tax cuts in the 2024-25 budget also took effect in the quarter, giving an additional boost to disposable incomes.
Real labour costs surge with wages growth
Real labour costs for employers have surged as a result of a tight labour market and high wages growth.
In the 2023-24 financial year, the real (inflation adjusted) unit cost of labour grew by a dramatic 3.0% across the Australian economy.
Real labour costs should fall steadily over time. In the last four decades, they have only risen twice – during the early-90s recession and the mining boom – and never by 3% in a single year.
The increase in real labour costs is driven by high wages growth, which is currently outstripping both inflation and economic growth more broadly.
