Australia’s economic growth beat analyst forecasts over the first few months of the year, but there is evidence the benefits are being felt more by business owners than workers.
- GDP rose more than economists were expecting, with the economy growing 3.3 per cent over the past year
- Compensation of employees was up 5.5 per cent over the past year, but business profits were up 21.6 per cent
- The biggest surge in imports since December 2009 was the biggest drag on the economy
The Australian economy grew 0.8 per cent in the March quarter and 3.3 over the past year, according to the National Accounts data from the Australian Bureau of Statistics.
Economists surveyed by Reuters had typically been expecting quarterly growth of 0.5 per cent and 2.9 per cent over the year to March 31.
The biggest contributors to the better-than-expected result were:
- a rise in inventories as businesses restocked following supply chain disruptions (+1 percentage point)
- household consumption (+0.8 of a percentage point)
- government spending (+0.6 of a percentage point).
The biggest drag on the economy was a surge in imports — which subtracted 1.7 percentage points from GDP — as some COVID-related supply bottlenecks eased and businesses restocked.
The ABS noted that the first three months of this year saw the biggest jump in imports since the December quarter of 2009.
‘Consumers happy to get out there and spend’
The rise in government spending was largely driven by health costs as the Omicron wave of COVID-19 hit Australia in earnest.
But, despite disruptions from both Omicron and bad weather in Australia’s east, travel, recreation and eating out dominated the 1.5 per cent rise in household spending.
Transport services (+60 per cent), recreation and culture (+4.8 per cent), and hotels, cafes and restaurants (+5.3 per cent) were all big beneficiaries as COVID-19 restrictions eased.
The ABS noted that the March quarter was the first time discretionary spending —purchases that consumers do not have to make —had recovered to be above pre-pandemic levels.
ANZ economist Felicity Emmett said that was a good sign for the economic outlook.
“Many of us — ourselves, the RBA — are expecting consumer spending to be a key driver of strong growth through 2022,” she told ABC TV’s The Business.
Much of that spending was paid for by a fall in the household saving ratio from 13.4 to 11.4 per cent, although it remains well above pre-pandemic levels of 7 per cent or less.
“So it’s got a lot further to fall, and I expect that we will see that over the next couple of years,” added Ms Emmett.
Wages growth trails surge in profits
One reason why savings rates are falling is that wages growth continues to lag behind the rising price of goods and services.
The ABS reported a 1.8 per cent increase in the total compensation of employees during the quarter, even though hours worked fell 0.9 per cent due mainly to Omicron-related absences.
Ms Emmett said ANZ’s calculations show that means hourly pay rose around 2.7 per cent in the quarter, and 5.3 per cent over the past year, far more than the 2.4 per cent pay increase recorded in the ABS March quarter Wage Price Index.
“I think that’s going to really ring alarm bells for the RBA,” she said, referring to the implications that much bigger pay rises would have for continued high inflation.
However, Ms Emmett also noted that the fall in hours worked during the quarter was due to the Omicron wave of COVID-19 and that many workers would have received paid sick leave while absent from work, skewing the hourly pay figure higher.
This appears to be reflected in the National Accounts, where the rise in pay was matched by a 1.9 per cent rise in employed persons, meaning the increase in pay was spread across more workers, even if they worked fewer hours.
The ABS also recorded a jump in labor productivity of 1.7 per cent over the quarter, as workers maintained output despite staff absences, leading to a strong productivity gain of 2.8 per cent over the past year.
This resulted in a 2.7 per cent annual fall in so-called real unit labor costs, the key measure of the cost of wages as a share of output produced.
It comes as no surprise then that the so-called gross operating surplus (essentially profits) of non-financial businesses jumped 7.3 per cent in the quarter, led by mining (due to big commodity price increases for LNG, coal and iron ore) and wholesale trade (on improved profit margins for grains, petroleum and cars).
However, the ABS noted a fall in profits for manufacturers, largely driven by a rise in input costs, as well as falls for construction, hospitality and other services as government subsidies wound down.
Profit share of GDP at ‘record high’
Over the past year, compensation of employees has risen 5.5 per cent, with much of the increase reflecting a greater number of people in employment, rather than wage increases.
Over the same period, the gross operating surplus of non-financial businesses has surged 21.6 per cent.
“One of the impacts of higher terms of trade and profits is that the share of income going to profits is larger than wages,” noted EY’s chief economist Cherelle Murphy.
A microcosm of this national trend is a pay dispute currently underway at the Golden Circle food processing factory in Queensland.
Workers there stopped work on Wednesday over a pay dispute. They want a pay rise that keeps up with inflation (currently 5.1 per cent) but say the company is offering between 2-2.5 per cent per annum over a four-year year agreement.
“We are just asking for a fair go after we turned up every day through pandemics and floods and everything else,” said United Workers Union delegate and Golden Circle worker of 23 years Natasha Wisniewski.
“We are taking action because we don’t think it’s fair that we fall so far behind as cost of living skyrockets.”
Golden Circle, owned by US food giant Kraft Heinz, responded:
“‘We are passionate about the ongoing success of our Northgate factory and have been actively engaging with all interested parties over the last few weeks. We will continue to focus on reaching a mutually agreeable outcome.”
‘It’s been quite tough’ for business
Not that the current environment has been smooth sailing for many businesses.
Schibello Coffee Group roasts about 10 tonnes of beans every week at its warehouses in Sydney and Brisbane to supply customers across Australia and the Asia-Pacific.
When the Omicron variant of COVID-19 arrived, it was a big hit to their operations.
“We probably had about 40 per cent of our workforce during January and February that were impacted,” said director and chief operating officer Aleksandar Mitrevski.
“A lot of our customers were impacted as well, so it was a pretty big dip from January [the] year before.
He said the business worked hard to keep supplying its customers in New South Wales, Queensland, Victoria, Western Australia, Fiji, Indonesia, Hong Kong, Shanghai and Singapore.
However, as reflected in the strong result for cafes and restaurants in the National Accounts, the disruptions have hit supply much more than demand.
“The demand is quite strong for coffee, tea and the social aspect,” Mr Mitrevski said, adding that he expects that to continue even when the recent bounce in spending on non-essentials fades.
“As discretionary spending tightens up, consumers will still go to the cafe to, you know, to enjoy that coffee experience.”
While Mr Mitrevski believes the hospitality industry is “in a phase of recovery”, inflationary pressures are starting to bite.
“One of the biggest challenges for the cafe, hospitality industry, is the short supply of workers and the increase in demand for wages,” he said.
Getting their coffee to their customers is another rising cost Schibello Coffee Group is facing.
“You only have to look at a lot of the suppliers they’ve now got contracts in place for fuel surcharges … and with the latest crisis in Russia and the global markets, I can’t see that easing anytime soon.”
The rise in costs was also reflected in the national accounts, with one measure of inflation jumping 2.9 per cent over the quarter, the highest since March 1988, and the domestic level of inflation at 1.4 per cent, the fastest pace of price increases since the introduction of the GST added 10 per cent to the cost of many goods and services overnight.
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