Private demand stagnates as the per capita recession continues

The September quarter 2024 national accounts numbers were not pretty. Granted, the economy did manage to expand for a 12^th consecutive quarter. But the pace of that growth was disappointing, coming in below market expectations and – in annual terms – producing the weakest outcome since the early 1990s recession aside from the COVID-19 downturn.

In per capita terms the economy went backwards once again, extending Australia’s current record-long ‘per capita recession’ to seven straight quarters.

Along with an expanding population, growth this quarter was reliant on the ongoing rise in public final demand in the form of increased government consumption and investment spending. In contrast, private final demand has now failed to contribute to quarterly growth for the past two quarters. Household consumption has either stagnated or gone backwards over that period, while across the past three quarters, total private business investment has flatlined due to contracting investment in the mining sector.

This weakness in private sector activity is in line with the pessimistic findings of our 2H 2024 Director Sentiment Index (DSI), which was conducted in September this year and which reported considerable pressures from the cost of living, inflation, interest rates and low productivity growth.

It is also a reminder that the RBA needs to balance the downside risks to growth against its fears about inflation persistence. Granted, taking that balance into consideration seems unlikely to have any implications for next week’s monetary policy meeting, at which Australia’s central bank is widely expected to leave the cash rate target unchanged for a ninth consecutive time. But it should influence the debate around the timing of a rate cut next year. Financial markets agree: the immediate market response to the GDP numbers was to bring forward their estimate of the likely timing of a first rate cut from May 2025 to April 2025.

While there is no disguising the negative picture painted by the national accounts, there was some positive news to be found in the rest of the week’s data releases. The retail sales and the monthly household spending indicator results for October both came in stronger than the market had expected. This evidence of a degree of recovery in consumer spending is in line with the improvement in household sentiment numbers that has been reported for October (and November) in the monthly Westpac-Melbourne Institute and weekly ANZ-Roy Morgan results. It is also consistent with the lift to household spending power coming from lower inflation and the Stage 3 tax cuts. So, it is possible that the December quarter of this year will be better than the September one. So far, however, private sector economic activity has been struggling.

More on the GDP numbers and the rest of this week’s data releases below, along with the regular linkage roundup.

The economy remained weak in the September quarter of this year

The ABS said that real GDP growth in the September quarter 2024 was 0.3 per cent over the quarter (seasonally adjusted) and 0.8 per cent over the year. The quarterly rise marked a 12^th consecutive quarter of expansion and growth was up slightly on the June quarter’s 0.2 per cent. But the result was below market expectations for a 0.5 per cent print. The pace of annual growth was likewise softer than the consensus forecast of 1.1 per cent and marked a slowdown from the previous quarter’s one per cent year-on-year increase. It was also the weakest rate of annual growth recorded since the December quarter 2020’s pandemic-induced contraction, or since 1991 and the early 1990s recession if the COVID-19 period is excluded.

Once again, output growth failed to keep pace with population growth (which ran at an annual rate of 2.4 per cent), and Australia’s per capita recession extended into a seventh consecutive quarter. GDP per head fell by 0.3 per cent over the September quarter to be down 1.5 per cent over the year. The current per capita recession is the longest on record, exceeding previous periods of extended weakness in the early 1980s and early 1990s.

Labour productivity, measured as GDP per hour worked, fell 0.5 per cent over the quarter and was down 0.8 per cent in annual terms. Productivity in the market sector also fell over the quarter (down 0.5 per cent) although it was 0.7 per cent higher in annual terms.

The public sector drove growth as private demand stalled

Economic growth was reliant on public sector demand and net exports in the September quarter, with private sector demand making no contribution to real GDP growth.

General government consumption rose 1.4 per cent over the quarter and 4.7 per cent over the year, contributing 0.3 percentage points to quarterly growth and boosted by the extension of federal and state government energy bill relief schemes. At the same time, public investment rose 6.3 per cent over the quarter and 2.3 per cent over the year, reversing three prior quarters of contraction and contributing a further 0.3 percentage points to overall growth. Within that total, general government investment was boosted by imports of defence equipment as well as investment in hospital and road projects, while state governments and public corporations lifted spending on what the ABS called the three Rs - major road, rail, and renewable projects. The level of public investment in the September quarter was the largest on record.

All up, total public final demand contributed 0.6 percentage points to growth, growing by 2.4 per cent over the quarter and 4.2 per cent over the year.

In contrast, final private demand was flat on a quarterly basis and rose by just 0.7 per cent in annual terms. Household consumption was largely unchanged over the quarter, up just 0.4 per cent in annual terms, and made no contribution to quarterly GDP growth. Spending on essentials fell 0.1 per cent quarter-on-quarter due to the combined effects of the federal and state government energy bill relief measures switching expenditure from the private to the public sector, as well as milder winter conditions leading to lower demand for heating. Discretionary spending edged up by 0.1 per cent led by clothing and footwear.

Private gross fixed capital formation rose 0.1 per cent over the quarter and 1.3 per cent over the year, but once again this was insufficient to register a meaningful contribution to quarterly GDP growth, with a fall in private business investment offsetting a rise in dwelling investment.

A decline in total inventories subtracted 0.4 percentage points from growth while net exports added 0.1 percentage points.

The household saving ratio increased

The household saving ratio rose to 3.2 per cent in the September quarter 2024 from (an upwardly revised) 2.4 per cent in the June quarter, as a 1.5 per cent increase in gross disposable income ran ahead of a modest 0.6 per cent rise in nominal household spending. Household disposable income last quarter was lifted by the impact of the Stage 3 tax cuts, which the ABS reported saw a 3.8 per cent fall in the amount of income tax paid by households.

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Nominal GDP growth was also soft

The nominal economy grew by 0.4 per cent over the quarter and 3.5 per cent over the year. That was the slowest annual rise in nominal GDP since the December quarter 2020. The GDP implicit price deflator rose 0.1 per cent in quarterly terms as a rise in the domestic final demand deflator was offset by a 2.5 per cent quarterly drop in the terms of trade.

That drop was driven by a third consecutive quarterly fall in export prices as weaker demand from China for coal and iron ore contributed to softer global commodity prices. The terms of trade are now down more than 17 per cent from their recent peak in the June quarter 2022.

The non-market sector supported industry growth last quarter

Gross value added (GVA) was up 0.3 per cent over the quarter, with 11 out of 19 industries reporting an increase in activity. Across the three non-market industries, GVA rose 1.3 per cent in both Public administration and safety and Education and training, and by 1.2 per cent in Health care and social assistance. Together, this group contributed 0.3 percentage points to quarterly growth.

Other industries contributing positively to growth in GVA over the September quarter included Agriculture, Forestry and Fishing (up 6.6 per cent over the quarter and contributing 0.2 percentage points) as well as Construction and Financial and Insurance services (both up 0.9 per cent over the quarter and each contributing 0.1 percentage points to total growth). Operating in the opposite direction, both Mining and Professional, Scientific and Technical Services subtracted 0.1 percentage point from quarterly growth.

What else happened on the Australian data front this week?

The ABS said that its Monthly Household Spending Indicator (MHSI) rose 0.8 per cent over the month (current prices, seasonally adjusted) in October 2024 and increased by 2.8 per cent in annual terms. That comfortably exceeded market expectations for 0.2 per cent monthly and 2.3 per cent annual gains. The Bureau said that spending rose across all nine categories in October, with Recreation and culture leading the way due to households buying tickets for upcoming international music concerts and sporting events. Note that the ABS will cease publication of its retail trade publication after June 2025, with the MHSI taking its place.

The ABS also reported that retail sales rose 0.6 per cent over the month (seasonally adjusted) in October 2024 to stand 3.4 per cent higher than in October 2023. The monthly increase was the third consecutive rise and like the MHSI, it also came in above the market’s median forecast, which had expected a 0.4 per cent monthly print. The annual growth rate was the strongest recorded since May 2023. According to the Bureau, a stronger than usual October result reflected an increase in sales activity ahead of Back Friday Sales, with some retailers using early discounts to attract shoppers. It is also possible that this is evidence of the long-awaited boost to household consumption from tax cuts, energy bill relief, lower rates of inflation and the assumption that the next move in the cash rate – when it finally arrives – will be lower.

Consistent with this story, the ANZ-Roy Morgan Consumer Confidence Index rose 2.7 points to 88.4 for the week ending 1 December 2024. That took the index up to its highest level since May 2022. The increase reflected jumps in the ‘future financial conditions’ (up four points) and ‘time to buy a major household item’ (up 7.5 points) subindices along with more modest gains for ‘current financial conditions’ (up 0.9 points) and ‘medium-term economic confidence’ (up 1.8 points). There was also a slight offsetting decline in the ‘short-term economic confidence’ subindex which slipped by 0.8 points. The increase in the ‘time to buy a major household item’ subindex was the largest weekly gain for that measure since Black Friday sales in 2023 and returned the subindex to its highest level since May 2022. Weekly inflation expectations fell 0.2 percentage points to 4.8 per cent.

CoreLogic’s national Home Value Index (HVI) rose by just 0.1 per cent over November 2024 to be up 5.5 per cent over the year. The combined capitals index was also up just 0.1 per cent over the month and 5.4 per cent over the year, with values falling over the month in Melbourne (down 0.4 per cent), Sydney (down 0.2 per cent) and Hobart (down 0.1 per cent). Elsewhere, growth was strongest in Perth (up 1.1 per cent), Adelaide (up 0.8 per cent) and Brisbane (up 0.6 per cent). While the national monthly rise marked a 22^nd consecutive increase, it was the slowest growth number since January last year, and CoreLogic said that the rise ‘could be close to the last in this cycle’, noting that a ‘downturn is gathering momentum in Melbourne and Sydney.’ The data provider said that supply has been increasing (Sydney and Melbourne listings are running 10.4 per cent and 9.1 per cent above their previous five-year averages respectively) and slowing purchase activity (capital city home sales over the past three months are down 4.6 per cent over the year). Auction clearance rates are now below 60 per cent.

Meanwhile, the CoreLogic national rental index was up 0.2 per cent in monthly terms and 5.3 per cent in annual terms in November. The annual rate of increase was the lowest since April 2021 and well down on the more than eight per cent growth recorded this time last year. CoreLogic reckons that ‘it looks increasingly likely the rental boom is over,’ although rents are still rising at well above their pre-pandemic decade average of two per cent. Slower migration leading to slower population growth and a gradual increase in household size are both headwinds for growth in demand.

The total value of residential dwellings in Australia rose by $156.3 billion to $11.1 trillion in the September quarter 2024 – pushing through the $11 trillion mark for the first time. According to the ABS, the number of residential dwellings rose by 53,100 to 11.3 million while the mean price of residential dwellings rose by $9,300 to $985,900.

The ABS said that total dwellings approved rose 4.2 per cent (seasonally adjusted) to 15,498 in October 2024. That was up 6.1 per cent over the corresponding month last year. Approvals for private sector houses were down 5.2 per cent month-on-month but up 2.4 per cent year-on-year, at 9,191. At 5,859, approvals for private sector dwellings excluding houses surged by 24.8 per cent over the month and rose 7.1 per cent over the year. According to the Bureau, the latter reflected approvals for high-rise apartments in New South Wales and Victoria, with the number of high-rises approved the highest total since January this year.

ANZ-Indeed Australian Jobs Ads fell 1.3 per cent over the month in November, following a revised 0.7 per cent increase in October. The series is now down 27.6 per cent from its June 2022 peak but remains 15.1 per cent above pre-pandemic levels.

The latest edition of Government Finance Statistics reports that the general government net operating balance was a deficit of $18.3 billion in the September quarter 2024. That was down $32.7 billion from the June quarter result, reflecting a 17.3 per cent decline in general government taxation revenue, which fell from $226.9 billion in the June quarter to $187.7 billion in the September quarter. As a result, total general government revenue was down 14.1 per cent over the same period. In contrast, total general government expenses were just 2.1 per cent lower.

Australia ran a sixth consecutive current account deficit in the September quarter 2024. The ABS said that the deficit was around $14.1 billion, about $2.2 billion smaller than the June quarter’s $16.4 billion deficit. The surplus on goods and services trade narrowed to $3.3 billion last quarter from $6.5 billion in the June quarter but the impact on the overall balance was more than offset by a fall in the net primary income deficit, from $22.8 billion to $17.3 billion, as dividends paid by Australian firms to overseas investors declined alongside interest payments on Australian debt. Falling export prices (led by a third consecutive quarterly decline in coal and iron ore prices) meant that Australia’s terms of trade dropped by 2.5 per cent over the quarter and were down 3.9 per cent relative to the September quarter 2023.

The ABS said that Australia’s international trade balance on goods rose by $1.4 billion in October 2024 to a surplus of $5.9 billion. Exports were up 3.6 per cent or almost $1.5 billion, driven by sales of other mineral fuels, while imports were largely unchanged from September.

The ABS published Business Indicators Australia, which reported that company gross operating profits fell 4.6 per cent over the quarter and dropped 8.5 per cent over the year in the September quarter 2024 while total wages and salaries were up 1.2 per cent in quarterly terms and four per cent in annual terms over the same period.

Last Thursday, the ABS said that total new private capital expenditure rose 1.1 per cent over the September quarter 2024 (seasonally adjusted) to be up one per cent over the year. Estimate 4 for capital expenditure in 2024-25 was $178.2 billion, up 5.1 per cent from Estimate 3.

Another ABS release from the end of last week was the Energy Account Australia for the 2022-23 financial year, which reported that Australia’s net energy use increased by two per cent that year, marking the first increase since 2018-19. The Bureau said that an increase in higher end use for both businesses and households was mostly driven by a post-COVID-19 recovery in air travel and household use of fuel for transportation. Renewable energy extraction of hydro, solar and wind rose 12 per cent over the year.

Other things to note . . .

• The ABS presents ten facts about the Australian economy in the September quarter 2024.
• Also from the ABS, an update on measuring the labour contribution of unpaid care. And the Bureau has introduced improvements to its estimates of digital services in the balance of payments.
• Last week’s speech from RBA Governor Michele Bullock on Economic conditions and the RBA’s transformation. According to the governor, ‘Monetary policy settings will…need to remain restrictive until the Reserve Bank Board is confident that inflation is on track to return sustainably within the target range and approach its midpoint of 2.5 per cent. Our forecasts…suggest that a sustainable return to target will occur in 2026.’ The central bank thinks that the level of demand remains too high relative to supply and that labour market conditions are too tight to be consistent with low and stable inflation.
• More from the RBA – a new Research Discussion Paper looking at the clean energy transition and the cost of job displacement in energy-intensive industries.
• John Hawkins analyses the recently restored move to a separate Monetary Policy Board for the RBA.
• The Business Council of Australia has published Regulation Rumble 2024, which compares Australia’s states and territories in terms of their planning systems, payroll taxes, land taxes, licensing and other regulations. According to the report, South Australia has the best regulatory and tax settings for doing business in Australia, followed by Tasmania and the Australian Capital Territory. Victoria was ranked in last place.
• The Productivity Commission’s modelling of proposed National Competition Policy reforms.
• From the Department of Climate Change, Energy, the Environment and Water, the June 2024 quarterly update on Australia’s greenhouse gas emissions; the third Annual Climate Change Statement; and Australia’s emissions projections 2024.
• A review of Rick Morton’s Mean Streak and its examination of the robodebt scheme.
• The December 2024 OECD Economic Outlook echoes the IMF’s previous assessment in paying testament to the resilience of the global economy this year. The OECD reckons that global growth will edge up from an estimated 3.2 per cent in 2024 to 3.3 per cent in 2025 and in 2026. Inflation is expected to continue to slow across most countries, with inflation already back to target in nearly half of all advanced economies and almost 60 per cent of emerging markets. Growth in Australia is projected to accelerate from just 1.1 per cent this calendar year to 1.9 per cent next year and 2.5 per cent in 2026. Consumer price inflation in Australia is expected to ease from 3.2 per cent this year to 2.3 per cent next year before rising to 2.6 per cent in 2026. The Outlook also highlights an intensification of geopolitical risks and policy uncertainty, the danger that inflation could prove more persistent than expected, the possibility that downside surprises could trigger a repricing of risk by financial markets, uncertainties over China’s growth prospects, and the ongoing correction in commercial real estate markets. On the other hand, it also canvasses the possibility of some positive surprises including a swift de-escalation of conflict in the Middle East leading to lower oil prices and lower global uncertainty, stronger than expected household spending, and scope for positive supply shocks.
• The OECD’s Pensions Outlook 2024 and Pension Markets in Focus 2024. According to the OECD, over the past two decades, pension assets as a share of GDP in advanced economies have nearly doubled, rising to an average of 55 per cent. In eight countries they now exceed 100 per cent of GDP. With total assets over US$56 trillion, pension funds are now the largest investors in global capital markets, including public equity and debt markets as well as emerging private capital markets. They own nearly one-fifth of global public equity market capitalisation.
• Related, on the affordability of long-term care systems during rapid population ageing.
• The IMF says global debt as a share of world GDP fell by about one percentage point to 237 per cent in 2023. Globa private debt fell 2.8 percentage points to 143 per cent, more than offsetting an increase in public debt, and is now below its 2019 level. The Fund explains this private debt decline in terms of deteriorating growth prospects reducing the attractiveness of debt financing to firms and households.
• The December 2024 issue of the IMF’s Finance & Development magazine focuses on the housing market, with pieces on the housing market challenge, whether housing markets are broken, the affordability crunch, the true cost of living, the role of cities in economic growth and how to spot housing bubbles, plus global housing snapshots from China, Brazil and Africa.
• Claudio Borio on the future of inflation targeting as a global monetary standard.
• Richard Koo on Trump, tariffs, and exchange rates.
• Dani Rodrik explains why Bidenomics did not deliver at the polls. He recaps four possibilities: (1) this particular version of economic populism was just a mistake; (2) there actually was a positive political payoff but it was swamped by the political losses incurred through higher inflation and a general anti-incumbent swing; (3) the policies needed more time to build a new political coalition; and (4) that it was the wrong kind of economic populism, focused on manufacturing and unions in an economy where only eight per cent of workers are employed in the former. Rodrik’s preferred explanation is this last one – he thinks a 21^st century workforce employed in services requires a 21^st century version of industry policy.
• The relative economic outperformance of the US economy continues to exercise minds at the FT: this week there was a Big Read story explaining why America’s economy is soaring ahead of its rivals, a Martin Wolf column on what makes the US truly exceptional, and a Ruchir Sharma opinion piece arguing that US financial market valuations represent the mother of all bubbles.
• A look at the inflationary effects of metals price shocks.
• The Economist magazine explains why Black Friday sales grow more annoying every year. The answer relates to a kind of collective action market failure known as ‘unravelling.’
• Also from the Economist, the magazine’s best books of 2024.