Economic growth steady, but uninspiring, in Q2

GDP reading: The economy remained frail in the second quarter, with GDP growth coming in stable at 0.2% on a seasonally adjusted quarter-on-quarter basis for the third consecutive quarter. The result had been penciled in by markets and marked the joint-slowest expansion in nearly two years. On an annual basis, economic activity rose 1.0% in Q2, coming in below the previous period's 1.3% print and marking the slowest rise since Q4 2020.

Drivers: The quarterly print reflected a deterioration in private spending and a smaller build-up in inventories largely offsetting a positive contribution from the other components of domestic demand and net trade. Domestically, private consumption plunged at the steepest rate in nearly three years, falling 0.2% in the second quarter (Q1: +0.6% s.a. qoq). Deeper pessimism among consumers, a jump in the unemployment rate, sticky inflation and elevated borrowing costs dragged on household budgets, driving a decrease in discretionary spending compared to Q1. More positively, public spending growth ticked up to 1.4% in Q2 (Q1: +1.2% s.a. qoq) on the back of rising social spending. In addition, fixed investment declined at a softer rate of 0.1% in Q2, following a 0.6% contraction in the prior quarter. On the external front, net trade continued to contribute to overall growth: Though exports of goods and services growth slowed to 0.5% on a seasonally adjusted quarterly basis in Q2 (Q1: +0.8% s.a. qoq), imports of goods and services swung into a 0.2% contraction (Q1: +6.1% s.a. qoq).

GDP outlook: Shifting to the current quarter, our panelists expect the economy to step on the gas amid a recovery in household spending, and available data supports these predictions. Softer inflation in July likely supported household budgets, while goods exports rose in July in monthly terms after stagnating in Q2, hinting at stronger external demand. Over 2024 as a whole, our Consensus is for economic growth to cool from 2023 owing largely to tight financing conditions. That said, recovering tourism, healthy population growth and sturdy global commodity demand will remain tailwinds. A protracted malaise in the Chinese economy—a key trade partner—is a downside risk.

Panelist insight: Nomura’s Andrew Ticehurst commented on the outlook: “The Q2 national accounts reveal weak and unbalanced growth. […] Modest output growth was again reliant on the public sector, and on continuing population growth, with GDP per capita recording a sixth-consecutive quarterly decline. The RBA could regard this report as moderately positive. Positive but sub-trend growth is closing the output gap (aggregate demand exceeding aggregate supply), and there were signs of more moderate price and wage pressures in the data. Less pleasingly for the RBA, weak productivity reported today remains a pressure point.” Analysts at Goldman Sachs said: “Overall, Australia’s economic expansion continues to be anemic, with today’s update highlighting particular weakness at the household level. Looking ahead, we expect a modest recovery in consumer spending over 2H2024 alongside ~$20bn of tax cuts, ~$6.5bn electricity subsidies, and easing inflation – however, the risks are increasingly skewed towards that recovery disappointing and the RBA [Reserve Bank of Australia] commencing an easing cycle in late 2024.”

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