He also referenced the handbrake on economic growth caused by acute skills shortages, which NAB chief executive Ross McEwan, speaking at The Australian Financial Review Banking Summit on Tuesday, described as “one of the most urgent issues that the new government should focus on”.
“I’ve tried to say there are elements of strong demand, tight labour market, there are some pleasing elements of the national accounts, but there are far more troubling aspects in our economy,” Dr Chalmers said. “The situation we’ve inherited is serious. In some instances, it is dire.”
Economists’ rosy view
But the view among economists was rosier. The result was ahead of market expectations for growth of 0.7 per cent over the quarter and 3 per cent over the year, according to the Australian Bureau of Statistics.
“The Australian economy began the year with a very bright start,” said Commonwealth Bank head of Australian economics Gareth Aird, noting that the result came amid COVID-19’s omicron wave and widespread flooding.
Domestic final demand contributed 1.6 percentage points to GDP growth, driven largely by household consumption (0.8 percentage points). Government spending – largely on healthcare – added 0.6 percentage points.
The army clean-up in response to the floods in NSW and Queensland also contributed to the rise, according to the ABS. Spending on the defence force was up 7.8 per cent in those states compared with 3 per cent in others.
The ABS said the estimated insured losses from the floods were $3.3 billion, making it the costliest flood event and fifth-costliest disaster on record, and the rebuilding effort would contribute to GDP growth in future quarters.
Surging commodity prices drove export values higher, ensuring a stellar outcome for national income despite a drop in export volumes. Nominal GDP rose 3.7 per cent over the quarter and 10.2 per cent over the year.
Exports of mining commodities increased 10.5 per cent in current price terms, which also led to a 14.7 per cent rise in mining profits. That will have a positive effect on the federal budget bottom line through higher tax revenue.
Rising global prices pushed Australia’s terms of trade to a record high during the quarter, climbing 5.9 per cent. The share of national income going to profits also set a record at 31.1 per cent.
The news is good, Mr Aird said, but he cautioned that the data pre-dated the Reserve Bank’s decision last month to raise the record low 0.1 per cent cash rate to 0.35 per cent and signal that more rises were coming.
“There are already signs that rising rates and the expectation of further hikes will act to cool the economy,” he said, citing recent data showing Sydney national house prices fell 1 per cent in May, and would probably fall further.
NAB group chief economist Alan Oster said the big four banks expected “solid growth” to continue in the near-term, in part supported by strong household consumption and a forecast pick-up in business investment. However, he said higher energy and petrol costs would act as a headwind.
RBA rate rise of 40bp tipped
The national accounts also showed that a key measure of inflation reached its highest level since 1988 and would add pressure to on the RBA to increase interest rates.
When combined with growth in average earnings of about 5.4 per cent, “there is a very strong argument” for a 40 basis point rate rise next week, ANZ senior economist Felicity Emmett said. Average earnings were closely watched by the RBA and were on track to easily hit the central bank’s June forecast of 6 per cent, she said.
Nomura economist Andrew Ticehurst backed that assessment.
“We continue to forecast a 40bp RBA rate hike next week, with the cash rate rising steadily to around 2 per cent by end-2022 and to a moderately restrictive level of 2.75 per cent by mid-2023,” Mr Ticehurst said. He expected that to be the consensus view before the June RBA meeting.
He also labelled Wednesday’s data as “noisy” and suggested that it needed to be interpreted carefully, but “the outlook remains positive”.
Stockpiling, spending boost growth
Although not echoing Dr Chalmers’ downbeat tone, Deloitte partner Stephen Smith said Wednesday’s economic data suggested that the economy was “finely balanced” rather than reflecting underlying strength.
“In our view, some caution is required in terms of thinking about the outlook over the next 12 months,” Mr Smith said. “If we look at the domestic side, it’s very much propped up by government spending. Household consumption was a touch stronger than expected but only just above pre-COVID levels.
“The outlook from here is clouded by a rapidly darkening international environment and, in that context, business investment domestically will be crucial in needing to underpin the outlook.“
Businesses building up inventories closer to pre-pandemic levels as supply constraints eased in the quarter contributed 1 percentage point to GDP, partly offsetting the 1.7 percentage point drag caused by net exports.
The household savings ratio – the portion of people’s take-home pay they stash away – continued to fall – from 13.4 per cent to 11.4 per cent – but it is still well above the long-run average of about 5 per cent, as households continue to increase their cash buffers. The latest deposit data shows households have stashed away almost $270 billion since January 2020.
”The 11.4 per cent household saving ratio was the lowest since the start of the COVID-19 pandemic, but remains above pre-pandemic levels,“ ABS acting head of national accounts Sean Crick said.
Economists said this was likely to act as a buffer against rising prices and rates.
Household spending on discretionary goods and services rose 4.3 per cent, exceeding pre-pandemic levels for the first time, and the reopening of the international border resulted in a 60 per cent boost to transport services.
Spending was strongest in the eastern states most affected by the delta wave restrictions in the second half of last year. The ACT recorded 3 per cent growth, followed by Victoria on 2.7 per cent and NSW on 1.9 per cent.