Since the previous HSC Economist article, the ABS has updated a range of different statistics for the Australian economy. As growth recovers and returns to a sustainable rate, imports are continuing to rise and Australia’s long-term external stability is at risk as the current account deteriorates. And as the cost of living continues to rise, the general level of savings has fallen in Australia and consumers are choosing to eat into their savings in order to stay afloat. The RBA has no immediate plans to stop hiking the cash rate, which should, in theory, increase the level of savings and reduce the level of borrowing. But is the theory consistent with what is happening in practice in Australia? This fortnight’s article will analyse the recent statistic release by the ABS, describing key trends and drivers of trends, as well as making predictions for the future of the Australian economy over the next few months.
Despite rising inflation, GDP growth in Australia remains stable but the BOGS has fallen
According to the latest ABS statistics, the Australian economy grew 0.9% during the June Quarter, when calculated by “seasonally adjusted chain volume measures”. Not only did the GDP increase during the June quarter, but the GDP per capita increased too, rising by 0.5%. Overall, Australia’s GDP has increased by 3.6% when compared with a year earlier. This is well-within the sustainable growth target of 3-4%, as set out in the Mortimer Report (1997).
Australia’s economic growth was largely driven by net exports, which added 1.1 percentage points to GDP growth. Alongside this, Australia’s terms of trade rose by 4.6% in the June quarter and continues to be on an upward trajectory. This is highly significant for Australia, a country that specialises in inelastic exports, such as commodities, as the total outlay continues to increase despite the price of goods exported increasing. Therefore, Australia benefits from rising export prices, contrary to countries that specialise in goods and services with elastic demand.
So what drove this rise in exports during the June Quarter? Mineral ores were the main contributor to the boost in goods exports, with travel and transportation services driving the surge in services exports. Goods exports rose by 4.2% and services exports rose by 13.7% as international borders continue to re-open and travel restrictions continue to ease. Yet, despite strong export growth, Australia’s balance of goods and services surplus has decreased. The BOGS surplus fell by $8.4b to $8.7b in July alone.
Despite exports providing a hearty boost to Australian GDP growth in the June Quarter, July saw export growth decline significantly relative to previous months. Goods and services exports fell by 9.9%, as metals ores and mineral exports declined. Imports of goods and services rose by 5.2% as Australian citizens travelled overseas and travel debits accumulated. If this trend continues, there is potential for the BOGS to fall into a deficit in the next few months, as it has done historically. This could threaten the sustainability of Australia’s current account surplus, as the BOGS falls negative and the current account follows suit.
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Australians are earning less and saving less as the cost of living increases
In their latest update, the ABS also noted that Australia’s household savings ratio is declining towards pre-pandemic levels again. The household savings ratio declined from 11.1% to 8.7%, as the cost of living increases and households are forced to eat into savings in order to keep up with rising costs. The ABS notes that “household saving fell as the rise in household spending outpaced growth in gross disposable income”, meaning that households are beginning to spend more than they earn amidst rising costs.
This is extremely concerning, as it has the potential to reinstate Australia’s historical savings-investment gap and limit the ability of capital-intensive industries, such as mining, from accessing domestic investment. Instead, domestic firms will be forced to borrow from overseas as household savings reaches pre-pandemic levels, leading to greater foreign liabilities and worsened external stability as a result. Coupled with the aforementioned deteriorating current account, this has the potential to seriously damage Australia’s external position.
Linking back to the declining level of gross disposable income, many unions in Australia note that workers’ share of GDP in terms of wages have reached a record low, despite corporate profits as a share of income reaching a record high. Corporate profits as a share of income have increased from ~18% in 1960 to ~32.5% in 2022. Even though workers’ wages as a share of GDP has declined, productivity has increased. As per the ACTU, labour productivity grew to 2.1% and is at its highest for the decade. This disparity between corporations and workers has the potential to fracture the labour market and general workplace satisfaction over the next few years as living standards deteriorate, workers’ wages plummet and workers work harder than ever before.
