Economy powers on but ‘bigger challenges to come’, Jim Chalmers warns

Jim Chalmers issues a warning as Aussies continue to spend despite rising inflation, helping drive a solid quarter of economic growth.

Spending on travel boomed in the September quarter as Australians enjoyed freedom from Covid-19 restrictions. Picture: Brendan Radke

Jim Chalmers has warned of “bigger challenges to come” for the nation, after new figures showed the economy grew solidly through the three months to September as Australians defied cost-of-living pressures to spend big on holidays and eating out.

With Reserve Bank rate hikes yet to hit families’ budgets, households made the most of freedom from Covid restrictions and a booming jobs market, flocking to cafes and restaurants, and re-embracing travel, in what economists referred to as the “last hurrah” ahead of what is anticipated to be a much more difficult 2023.

National accounts figures showed real GDP climbed by 0.6 per cent in the September quarter to be 5.9 per cent higher than in the same period in 2021, when the Delta wave forced major east coast cities and states into lockdown.

The economy was 6.5 per cent larger than before the pandemic, confirming Australia’s relative success through the health crisis: the UK’s economy remains 0.4 per cent smaller than at the end of 2019, while eurozone GDP is 2.1 per cent higher than pre-Covid, and 4.3 per cent higher in the US.

The Treasurer said the latest figures from the Australian Bureau of Statistics “show the Australian economy performing solidly in the face of steep headwinds from overseas, as well as considerable and compounding pressures on Australian families and businesses”.

“Our economy has withstood the challenges facing it so far, but we know there are bigger challenges to come,” Dr Chalmers said. “These numbers capture some but not all of the pressures coming at us from around the world. The uncertainties facing our economy are ahead of us, not behind us.”

A 1.1 per cent lift in consumption accounted for much of the quarterly growth, as compensation of employees – the national wages bill – jumped by 3.2 per cent, the biggest increase since 2006, according to the ABS.

The ABS said the large increase in the minimum wage and the 0.5-percentage-point lift in the compulsory super contribution played their part, alongside employers competing for workers in a hot labour market.

 

After consumers contributed $3.2bn to the economy in the September quarter, EY chief economist Cherelle Murphy said the best of the post-Covid rebound was now behind us.

“As the RBA continues to increase rates to bring inflation back down, consumers will be left with little choice but to adjust their recent spending binge, and businesses will feel the pinch accordingly,” Ms Murphy said.

The national accounts showed that despite the big lift in the wages bill, cost-of-living pressures continued to leave households worse off.

Real – or after-inflation – disposable household income fell for the fourth consecutive quarter, by 0.4 per cent, to be 4.2 per cent lower than a year earlier, the figures revealed.

A day after the Reserve Bank hiked rates for the eighth straight month to a decade-high of 3.1 per cent, CBA head of Australian economics Gareth Aird said the impact of higher borrowing costs was yet to be reflected in economic activity.

“Incomes have gone up but the price of stuff has gone up by more. Despite that, households have still been spending, and they’ve been able to do that for two reasons: this year’s increase in interest rate costs has barely come through, and the savings rate has dropped,” Mr Aird said.

The household saving ratio – which peaked at 24 per cent in mid-2020 then again at over 19 per cent in the Delta-affected third quarter of 2021 – fell from 8.3 per cent in June to 6.9 per cent, back to pre-pandemic levels.

The ABS data showed spending in hotels, cafes and restaurants jumped by 5.5 per cent over the three months, while spending on travel surged by almost 14 per cent.

Car purchases climbed 10 per cent as the supply issues that have plagued the industry eased and dealers cleared order backlogs.

Strong home-building activity and engineering construction also added to growth in the quarter, as builders worked through a powerful pipeline of work.

The other major story in the national accounts was a steep 6.6 per cent drop in the terms of trade, as prices of key exports of coal and iron ore fell from very high levels, and import prices jumped.

Analysts said economic momentum would likely be maintained through the final months of 2022 as households enjoy a final flurry of spending leading up to Christmas and through the summer holidays.

From there, however, growth was expected to slow sharply as higher interest rates bite and the global slowdown gathers pace.

While climbing interest rates are yet to be fully reflected in household spending patterns, total mortgage payments jumped by 36 per cent in the quarter – a precursor of the pain to come.

Mr Aird said in a year’s time “growth will be significantly slower and the unemployment will be moving higher”.

By region, Victoria recorded the weakest performance in the quarter, with state final demand stagnant, versus a 0.6 per cent increase nationally.