- The economy had a pretty solid start to 2022;
- Consumer and government spending were the two biggest drivers;
- There are good reasons to think the economy will do pretty well over the next 1-2 years;
- But there are risks to the outlook.
The Australian economy just keeps surprising. First it was the resilience displayed through the pandemic. Now it is the height of the bounce since, as the economy is re-opening. Many overseas economies Q1 GDP numbers surprised with weakness. Not Australia.
GDP growth rose by 0.8% in the March quarter (above consensus estimates), and 3.3% over the past year. Consumption by both households and governments was the key driver of spending. Public investment remained strong, business investment on plant and equipment and intellectual property (notably IT and mining exploration) were also prominent. Firms re-stocking led to a sharp bounce in imports. High commodity prices was a plus for national income growth. Bad weather and material and worker shortages constrained construction spending.
Despite rising inflation pressure, profit margins in many industries remained decent in the quarter (the exceptions were finance, recreation, utilities and accommodation and food services). But ongoing cost pressures will make things more difficult in coming quarters, particularly for firms unable (or unwilling) to pass cost rises onto customers.
As confirmed by other indicators, wages growth is picking up. The consumer measure of inflation contained within the GDP numbers (private consumption deflator) rose broadly in line with the CPI numbers. Broader measures of inflation in the economy rose even faster.
The household saving ratio declined modestly in the March quarter as more households were both able and willing to spend. The saving ratio though remains high by historical standards. Further reductions in the saving rate are likely in coming quarters as the economy continues to re-open (notably for travel), a desire to spend following two tough years and a need to dip into saving to offset declining real wages growth.
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist