Data points to a flat outcome in the second quarter, following Q1's modest growth
The gross domestic product for the second quarter of 2023 is expected to show a 0.5% quarter-on-quarter growth, confirming the slowdown in domestic demand that has been observed through various indicators, according to a new report from National Australia Bank. This figure represents a 1.9% year-on-year increase.
Both the Australian Bureau of Statistics' retail sales data and NAB's own transactions data point to a flat outcome for consumption in the second quarter, following a modest growth of 0.2% in the first quarter. However, business investment is expected to provide some support to domestic demand. The key driver of overall GDP growth for this quarter appears to be a solid positive contribution from trade.
Looking ahead, NAB expects a continuation of this pattern over the next two quarters, with a slight dip in household consumption growth as real incomes continue to be squeezed. The upcoming accounts will offer a more comprehensive picture of the underlying dynamics in the economy, shedding light on the evolution of disposable income growth and the savings rate. These factors will provide useful insight into household cash flows and offer more extensive information on services spending compared to the quarterly retail sales data, NAB said.
In terms of policy implications, NAB does not foresee significant immediate impacts based on this release. The bank continues to anticipate one final interest rate rise in November, although recent data and communication have increased the likelihood that interest rates have already peaked. The strength of services inflation in the coming months will be critical in determining the future course of interest rates. Looking further ahead, the outlook for growth will become increasingly important as rates remain in restrictive territory, inflation moderates, and the well-known lags between rates, activity, and inflation continue to play out.
NAB's forecasts suggest that the Reserve Bank of Australia may begin to ease rates in the second half of 2024, gradually bringing the cash rate back towards a more neutral level of around 3% by early 2025.
In terms of the expected GDP figures for the second quarter, NAB predicts a 0.5% quarter-on-quarter growth, with a 1.9% year-on-year increase. Real retail sales data for the second quarter and services spending in NAB's transaction data indicate a flat outcome for household consumption, following a modest 0.2% rise in the first quarter. However, it is worth noting that the consumption level for certain goods and services remains above pre-pandemic trend levels.
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Dwelling investment is expected to make a small negative contribution (-0.1%), continuing a trend of weakness despite a high volume of construction work in progress. Partial indicators for business investment suggest small gains in non-residential and engineering construction, while machinery and equipment are expected to show a healthy performance based on recent capital expenditure data.
Trade (net exports) is likely to provide a key support for GDP growth in the second quarter, offsetting the weakness in household consumption. However, there is significant uncertainty around the estimated contribution of 0.5 percentage points from trade, NAB reported.
National accounts measures of price pressures are expected to remain elevated. While the pace of growth in both the consumption and Domestic Final Demand (DFD) deflators eased in the first quarter, they both remained strong, tracking around 1% quarter-on-quarter. Some further easing is expected, in line with Consumer Price Index measures of inflation, although it's important to note conceptual differences between these measures, particularly in how they account for housing consumption.
Beyond the headline GDP and deflator figures, the accounts will provide an updated picture of household income and saving dynamics. The household savings rate declined to 3.7% in the first quarter, the lowest level since 2007, as nominal consumption growth outpaced disposable income growth. The two rate hikes in the second quarter, along with the ongoing impact of previous increases, will put further pressure on disposable income growth, compounded by interest and tax payments.
Looking forward, and excluding the volatility in trade numbers, NAB expects soft domestic demand growth in the second half of 2023, with a slight dip in household consumption. The pipeline of investment work for dwellings and buildings, as well as structures, is expected to provide support to construction activity. However, there may be some weakness in dwelling investment due to the downward trend in dwelling approvals, NAB said. Given these countervailing forces, some quarterly volatility is likely. Public spending is expected to continue making a small contribution to growth, with a substantial infrastructure pipeline serving as a key support.
The release of the GDP figures is unlikely to have significant implications for interest rates in the near term, although it will provide a more detailed snapshot of the economy, NAB reported. More timely data suggests that consumption has remained modest going into the third quarter, without a significant decline.
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