Economists issue inflation warning as GDP growth hits three-year high
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More news: Higher-than-expected GDP numbers for the year to December have added further credence to concerns the economy is running above its capacity limits, according to economists, putting pressure on the RBA to hike interest rates.
IFM Investors chief economist Alex Joiner said the 2.6% annual rate of GDP growth is “likely to be in excess of the economy’s potential growth rate that is estimated at being at or slightly below 2%. The consequence being the re-acceleration of inflation”.
He said the recovery of private sector spending “is a positive” but said the “prominence of the public sector…means that capacity is constrained”.
Joiner believes that the RBA “will likely feel that this rate of growth is not consistent with inflation coming back to the target band and as such we expect that it will need to hike rates at least one more time likely in May”.
State Street Investment Management APAC economist Krishna Bhimavarapu said the “pickup in consumption may be read as inflationary” and the “lingering uncertainty from the Middle East conflict” increases inflationary risks.
“In short, the RBA may judge it prudent to strike early, because Australia is still skating on thin ice when it comes to inflation,” Bhimavarapu said.
He warned that the “risk remains that the RBA could pull the next rate hike forward to March”.
Moody’s Analytics head of Australia economics Sunny Nguyen said the high GDP growth rate “strengthens the case that the economy can tolerate another nudge tighter if inflation risks demand it”.
“For the RBA, the key shift is that ‘growth risk’ has less veto power than it did a few months ago. Does that make a March hike likely? It makes it plausible,” Nguyen said.
Treasurer Jim Chalmers characterised the high GDP growth numbers as “a really encouraging set of numbers, a really welcome set of national accounts” in a press conference following the data release.
He highlighted that productivity picked up 1% in the 12 months to December, nominal unit labour costs “moderated to this lowest rate in nearly five years”, and business and dwelling investment grew, among other things.
Given the ongoing concerns about the economic impact of the US-Israel war on Iran, Chalmers said the broad based composition of the national accounts data creates a “robust foundation” to face global volatility.
Oxford Economics Australia head of economic research and global trade Harry Murphy Cruise said “we already forecast a rate hike in May; the conflict in the Middle East could tip any further lineball interest rate decisions towards another hike”.
Treasurer warns Iran war’s economic impact ‘likely to be substantial’
More news: Treasurer Jim Chalmers has warned that the economic impact of the US-Israel war is “likely to be substantial” and could weigh on the next federal budget in May.
Speaking to reporters following the release of GDP data for the December quarter, the Treasurer stressed the government is closely monitoring the rapidly changing situation and its implications for the budget, global economy, insurance markets and fuel prices.
When asked about how concerned the government is about the potential impact on inflation, Chalmers said “higher oil prices and other prices” could detract from economic growth, but said the government is “very pleased” OPEC agreed to increase oil supply on Sunday.
“Obviously, it depends very heavily on how much oil and gas infrastructure is damaged in the conflict. We know that there is a real risk of that. We know that there are tankers anchored in the Strait of Hormuz. That’s obviously very concerning to us as well,” Chalmers said.
“So those are all of the uncertainties. There is a very real prospect that it will put pressure on prices at the same time as it weighs on global growth, and the [Reserve Bank of Australia] and the government will monitor those developments very closely.”
In a separate question asking for a definitive answer on whether the government is considering new tax measures for the May budget, Chalmers said “we haven’t taken any decisions”.
“We haven’t changed our tax policies, but any further changes in tax policies or any further tax reforms would be a matter for cabinet in the usual way,” he said.
Economy grew 0.8% in December quarter
The news: The Australian economy grew 0.8% in the December quarter and 2.6% over the year in seasonally adjusted terms as nearly every industry saw production expand and spending across all levels of government rose.
This is higher than the market consensus expectation of 0.6% over the quarter and 2.2% over the year. It is also a faster growth rate than the 0.4% seen in the September quarter and the 2.1% in the year to September.
The numbers: GDP per capita was lifted 0.9% over the year to December, the fourth consecutive quarter of growth.
Private investment increased for the fifth consecutive quarter, growing 0.7% and contributed 0.1 percentage points to overall GDP growth over the quarter.
Data centre and aircraft investment remained high even though machinery and equipment investment fell 2% in the December quarter, following a 7.8% surge in September. Machinery and equipment investment was 4% higher over the year to December.
There were increased levels of production in 17 out of the 19 industry categories. Mining production increased 2.6% on the preceding quarter and contributed 0.3 percentage points to overall growth as mines resumed work following scheduled maintenance.
Public investment grew 0.9% over the December quarter after rising 3% in the September quarter. Commonwealth government investment lifted 3.3% on higher investment in a range of defence assets, according to the ABS, while state and local government investment lifted 1.4%, driven by transport infrastructure.
State and local government expenditure lifted 1% on electricity rebates and employee expenses across health, education and police, according to the ABS. Commonwealth government expenditure rose 0.8% in the quarter.
The household saving ratio lifted to 6.9%, from 6.1% in the September quarter, the highest level since the 2022 September quarter.
The context: With inflation remaining above the midpoint of the RBA’s target band and expected to remain there until early 2027, economists have been warning that the Australian economy is at the limits of its potential for growth.
The US-Israel war on Iran has also sent oil prices soaring amid supply fears. Economists say this would likely spiking petrol prices in Australia and potentially slow economic growth, which would have a “mixed” implication for the RBA’s next rates decision.
RBA governor Michele Bullock said on Tuesday that the impact of a prolonged conflict could “feed through into economic activity” but noted that it is “too early to say”.
What they said: “There was broad based economic growth in the quarter, with rises observed in a large majority of industries. Public and private demand each contributed 0.3 percentage points to GDP growth,” ABS head of National Accounts Grace Kim said.
The sources: ABS media release, ABS data
