Australian Bureau of Statistics data released on Wednesday showed gross domestic product (GDP) rose 0.8% in the March quarter from the previous quarter, beating market forecasts of a 0 gain, 5%.
Year-on-year growth fell to 3.3%, after hitting 4.4% in the December quarter, and most analysts expect growth to pick up again as consumers with cash seem happy to continue spending.
“This reinforces our view that the economy will weather rising interest rates and falling real incomes better than most forecasts,” said Marcel Thieliant, senior economist at Capital Economics.
“With the negative effect of net trade reversing and the reopening of the economy leading to another sharp rise in consumption, we have forecast a stronger 1.5% rise in GDP in the second quarter.”
Household consumption alone added 0.8 percentage point to growth in the first quarter, while government spending and inventories also made significant contributions. Much of this demand was met by imports, which subtracted 1.5 percentage points from GDP.
Consumers still have money to spend, with the household savings rate down only modestly to 11.4%, well above pre-pandemic levels.
INFLATION DRIVES RATE HIKES
Consumer resilience is a key reason the Reserve Bank of Australia (RBA) felt confident enough to raise interest rates to 0.35% in May, and to announce further hikes to come.
Markets are pricing in another 0.6% rise at the RBA’s June meeting next week, and hinting that rates could even hit 2.5% by the end of the year, given the urgent need to cool runaway inflation.
Inflation was evident throughout the GDP report, with the main price index rising 2.9% for the quarter, the biggest rise since early 1988.
Employee compensation, a proxy for wages, showed another big gain, with companies paying more to attract and retain staff.
However, higher prices also led to an increase in nominal GDP, which jumped 3.75% in the quarter and 10.2% for the year, taking output to A$2.2 trillion. ($1.58 trillion).
Australia’s terms of trade jumped 5.9% to a record high, helped by strong prices for its key commodity exports, which in turn helped the mining sector reap windfall profits.
All of this has had the effect of significantly increasing tax revenue and providing valuable support to the new Labor government, which is facing protracted budget deficits.
Treasurer Jim Chalmers, who promised during the election not to raise taxes, has already warned that spending will have to be cut if we want to limit the public debt.
($1 = 1.3922 Australian dollars) (Reporting by Wayne Cole; Editing by Christopher Cushing and Sam Holmes)