Business research

Australian Economic Update: Q4 2021 GDP

Overview

Fourth-quarter GDP rose 3.4% q/q (4.2% y/y), broadly in line with our estimate of 3.5%. Household consumption was behind this result, as containment measures eased in the fourth quarter, with spending on goods and services increasing by more than 6%, which helped overall consumption by more than recover from the third quarter slump and surpass pre-COVID-19 levels for the first time. The output side of the accounts and data for the states also reflects the impact of the easing of lockdowns in New South Wales and Vic, with service industries seeing strong gains in the quarter. The domestic final demand and consumption deflators strengthened, reflecting price pressures seen in other data (although these measures are volatile and affected by compositional shifts). On the labor cost side, the AENA per hour was rocked by fluctuations in hours worked, but continued to outperform the WPI at year-end, although the more volatile measure of unit labor costs labor fell during the quarter.

Today’s release does not change our growth forecast for the future, with the first quarter expected to be impacted by Omicron at the start of the quarter, but there are signs that activity has already rebounded. We continue to see growth of around 3.5% in 2022, and closer to trend growth of around 2.1% in 2023. With GDP now above pre-COVID levels and activity ahead stay healthy through 2022, the RBA will continue to focus on the nominal side. We expect unemployment to fall to around 3.5% by mid-2022 and wage growth to pick up, with the RBA having enough evidence that inflation is sustainably within the target range to begin to pick up. normalize rates in the second half of 2022.

In terms of today’s release, the data shows a strong rebound in activity as shutdowns ended in the two largest states. Spending was driven by a strong increase in household consumption, contributing 3.2 percentage points to growth. Business and housing investment and net exports made small deductions, which were offset by a strong contribution from inventories. Public spending also fell slightly after a very strong increase in the previous quarter. The impact of the removal of lockdowns was evident, with NSW and Vic seeing the largest increases in state end demand, while on the production side, household service industries led the gains by industry.

The impact of both price pressures and supply constraints was evident in today’s accounts. The domestic final demand deflator continued to strengthen, as did the consumption deflator. Labor cost measures were mixed, with average earnings continuing to hover just above 3%, while unit labor costs edged down. Supply constraints were particularly evident in housing construction, which saw sharp declines in all states other than NSW and the ACT.

Note a sharp drop in the savings rate after a peak at T3. The decline was driven by lower household income due to declining public support payments, as well as an increase in consumption. Nevertheless, the savings rate remains high at 14% and households have accumulated a large stock of savings during the pandemic. Pent-up demand for discretionary spending was evident in today’s data, signaling that households will continue to spend in 2022.

Looking forward to, We expect growth to slow in Q1 with the impact of Omicron early in the quarter, although high-frequency indicators suggest the hit was not as large as initially feared and the activity has already rebounded. We expect growth to continue at an above-trend rate in 2022, supported by strong household consumption and increased housing and business investment. Public spending should also provide support. Overall, this sees growth of around 3.5% in 2022 before closing in on trend growth in 2023. That said, while overall GDP is now significantly above pre-COVID levels, a a number of pandemic impacts remain, including high spending on goods and lagging trade in services. The extent to which these imbalances will normalize and how quickly will only become apparent as 2022 progresses.

Find out more in the NAB Australian GDP Q4 2021 report