Treasurer warns challenges ahead for economy

The economy is facing solid underlying demand and a tight labour market but also an economy that is weaker than expected, with significant challenges ahead.

2 June 2022 

The latest ABS national account statistics revealed Australian Gross Domestic Product (GDP) rose 0.8% in seasonally adjusted chain volume terms in the March quarter 2022 and was up 3.3% through the year.

Strength came from household consumption, which grew 1.5%, and from a record $7.5 billion ramp-up in inventories. The inventory build-up largely reflected the business community replenishing stocks.

Treasurer Jim Chalmers said the results reflected slower than expected growth, the impact of supply constraints, and cost-of-living pressures that had continued to grow since the March quarter.

“Many of today’s results fall well short of what Treasury had been expecting in the recent Pre-election Economic and Fiscal Outlook (PEFO),” Dr Chalmers said. 

“While household consumption was relatively strong growing 1.5% over the quarter, it was mixed across states and weaker than expected, due to a weaker than expected recovery in discretionary services.

“Net exports detracted a significant 1.7 percentage points from GDP growth in the quarter. This was due to a strong increase in imports, as businesses re‑built inventories and households’ demand for goods remained elevated.”

New business investment grew 1.4% in the March quarter to be 3.6% higher over the year, according to the ABS.

The average compensation per employee fell by 0.7% in the quarter to be only 2.2% over the year.

Meanwhile, the household consumption deflator – the National Accounts measure of prices facing consumers – increased by 1.5% in the quarter and is up 3.2% over the year.

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“This highlights the costs-of-living pressures impacting many Australian households,” Dr Chalmers said.

“While today’s results are backward looking, many of the economic challenges remain and have since become more substantial. The cost of living has continued to increase steeply.”

Labour shortages and ongoing absenteeism continue to constrain businesses and put pressure on supply chains across the domestic economy.

Mr Chalmers said the government was also looking to tackle the increasing energy costs as fuel and gas prices facing households remain elevated while electricity prices are set to increase.

The ABS statistics reveal petrol prices have also increased by about 12% since the end of April and as of last week, wholesale electricity prices have increased 237% since the end of March.

Over the past month, average east coast gas spot prices have increased 319% compared to 2019‑2022 spot prices.

“We are still facing a highly volatile international environment with the ongoing war in Ukraine continuing to disrupt global supply chains, China’s COVID response likely to impact global growth, and global inflationary pressures continuing to evolve,” Mr Chalmers said.

“Collectively, these results will have implications for the Budget which is already riddled with rorts and weighed down with a trillion dollars of debt with not enough to show for it.

“Despite the strong rise in the terms of trade in the quarter, it was less than what was factored in at PEFO, and there are other factors weighing on the Budget including the higher costs of borrowing on record debt.

“We can’t afford to be complacent given the difficult Budget position that we are in.”

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