Statement on Monetary Policy – November 20222. Domestic Economic Conditions

The Australian economy had substantial momentum over the first half of 2022 and timely indicators suggest growth held up into the September quarter. The labour market is currently very tight. Employment growth has been minimal since the middle of the year as many firms are finding it challenging to hire workers. Labour demand is strong, although there are signs it is easing slightly. Some parts of the economy have faced disruptions from adverse weather events and shortages of materials, but this has not weighed materially on investment intentions or perceptions of business conditions. While strong labour market conditions are supporting household incomes, household budgets are under increasing pressure from rising prices and higher interest rates. Housing prices have continued to decline since their peak in April this year.

The labour market is tight and employment growth has slowed

The labour market remains tight. The employment-to-population ratio and the participation rate are near record highs (Graph 2.1). The number of employed people in Australia is 4½ per cent higher than in February 2020, driven entirely by full-time employment. However, there was almost no employment growth in the September quarter.

Graph 2.1
Graph 2.1: A line graph of the employment-to-population ratio and participation rate starting from the mid-1960s. Both series are around historical highs.

Spare capacity in the labour market is at multi-decade lows. The unemployment rate has remained around 3½ per cent in recent months, while the heads-based underutilisation rate has been little changed at around 9½ per cent. Medium- and long-term unemployment rates have also remained steady (Graph 2.2). The medium-term unemployment rate, which is more representative of cyclical unemployment and so tends to be the most relevant for wages growth, is around its lowest level since the series began in 1991.

Graph 2.2
Graph 2.2: A two-panel line graph showing short, medium and long-term unemployment rates in the top panel and the aggregate unemployment rate in the bottom panel. All series are around multi-decade lows.

Hours-based measures of underutilisation are also at historically low levels as strong labour demand over the past year has been met through an increase in hours of existing workers, including via part-time workers moving into full-time employment and a greater number of people holding multiple jobs. However, average hours worked have remained below their mid-2021 level amid elevated rates of sick leave and annual leave (Graph 2.3). Only a small number of firms in the Bank’s liaison program have reported increasing headcount or the hours of existing staff to deal with high levels of sick leave this year. At the margin, the recent reduction in sick leave could alleviate some of the labour shortage pressures being experienced by firms.

Graph 2.3
Graph 2.3: A line graph showing sick leave as a proportion of usual hours worked across the calendar year. Sick leave in the first half of 2022 was around double the level observed between 2017 and 2019, but has declined more recently to be around levels typical for this time of year.

Indicators of labour demand have started to moderate in recent months but remain at high levels

Most measures of job advertisements and vacancies have stabilised or declined a little in recent months and fewer firms in the Bank’s liaison program plan to increase their headcount. Nonetheless, there are roughly as many vacancies as there are unemployed people and more than half of all firms in business surveys report that finding suitable labour is a significant constraint on activity (Graph 2.4). As a result, there is likely to be less scope for further growth in employment in the period ahead.

Graph 2.4
Graph 2.4: A line graph showing the share of firms reporting suitable labour as a severe constraint on output and the vacancies-to-unemployment ratio. Both series are at their highest levels since each series began and there are nearly as many job vacancies as there are unemployed people.

Job vacancies remain particularly high in industries most reliant on migrants for their workforce, such as accommodation & food services. While overseas arrivals and departures have increased since the reopening of the international border, the number of international students in the country remains well below pre-pandemic levels. Liaison suggests that the border reopening has not materially improved labour availability to date, in part because of delays in visa processing.

Job mobility remains higher than in the years preceding the pandemic, and is around the levels seen prior to the global financial crisis. The pick-up in job mobility since the onset of the pandemic continues to be driven by people wanting a better job or a change; the number of workers switching jobs for this reason has increased much faster than the number who report planning to do so, suggesting that some workers are taking advantage of attractive job offers even though they had not been actively looking for a new role. Changes in mobility have been mixed across industries. Job mobility in health care and professional services has declined after being elevated for most of the pandemic, while the job mobility rate in some business services has increased notably (Graph 2.5).

Graph 2.5
Graph 2.5: A six-panel line graph showing job mobility rates across different industries or industry groups. It shows that job mobility remains elevated in healthcare, has declined in professional services and has increased in other business services over the past three months.

Economic activity had strong momentum in the June quarter

The Australian economy grew by 0.9 per cent in the June quarter and by 3.6 per cent over the year. In the quarter, growth in household consumption was strong as spending on discretionary services, such as hotels & restaurants and overseas travel, continued to recover from the restrictions and international border closures that were in place during the pandemic (Graph 2.6). Household spending on goods was little changed in the June quarter but remained at an elevated level. Strong growth in consumption saw the household saving ratio decline further to be closer to, but still above, the levels that prevailed prior to the pandemic (Graph 2.7).

Graph 2.6
Graph 2.6: A bar chart showing quarterly GDP growth with contributions from discretionary services consumption, other consumption, exports and other. It shows that discretionary services consumption and exports drove GDP growth in the June quarter 2022.
Graph 2.7
Graph 2.7: A line graph of the household net saving ratio (saving as a share of disposable income, net of depreciation) in Australia starting from the 1990s. It shows that the saving ratio has declined from elevated levels to be a little above its average in the years leading up to the pandemic.

Growth in GDP was also boosted by a rebound in exports, following earlier production disruptions in the resources sector. By contrast, construction activity declined because of ongoing material and labour shortages, illness-related absences and weather-related disruptions. Public demand was broadly flat in the June quarter, but remained at a high level as a share of GDP.

The terms of trade rose strongly to a historical high, providing a substantial boost to national income –mainly in the form of higher profits for companies in the resources sector and higher tax revenue. Nominal GDP increased by 12 per cent over the year, close to its fastest growth rate in over 30 years, underpinned by the record terms of trade, strong growth in domestic prices and solid growth in the real economy (Graph 2.8).

Graph 2.8
Graph 2.8: A bar chart showing year-ended nominal GDP growth with contributions from real GDP, domestic prices and terms of trade. The graph shows that the year-ended nominal GDP growth rate in the June quarter 2022 was near its fastest in over three decades, supported by strength in all three factors. 

Household spending has grown solidly in recent months

A range of timely data sources suggest that growth in real household consumption was solid in the September quarter, but has slowed a little from the strong pace recorded around the middle of the year. Household spending growth was supported by continued recovery in spending on discretionary services, such as hospitality and travel. Retail sales values grew by 2.3 per cent in the quarter, underpinned by a further recovery in spending at cafes & restaurants and at department stores. A significant share of this increase reflected strong growth in retail prices, though volumes are estimated to have also risen (Graph 2.9).

These data are consistent with information from retailers in the Bank’s liaison program that suggests spending growth slowed a little recently (see ‘Box A: Insights from Liaison’). Liaison contacts suggest that retail sales values continued to grow in October.

Graph 2.9
Graph 2.9: A line graph of year-ended nominal retail and retail prices growth from 2018 to September quarter 2022. It shows strong year-ended growth in nominal retail sales and retail price growth.

Headwinds to household spending are strengthening

Nominal household disposable income (after taxes and interest payments) grew by 1 per cent in the June quarter despite a small increase in net interest payments by households. In aggregate, the value of household interest payments is larger than the value of interest receipts as the household sector holds more interest-bearing debt than interest-earning assets. Net interest payments will therefore continue to weigh on household disposable income growth in the quarters ahead, as cash rate increases since May 2022 are passed through to lending rates and fixed-rate loans expire (see chapter on ‘Domestic Financial Conditions’).

Graph 2.10
Graph 2.10: A line-bar chart showing quarterly growth in nominal household disposable income with contributions from different components: labour income, non-labour income, interest payable, interest receivable and other income payable. The chart shows that strong growth in labour income has supported disposable income recently.

Household budgets are also under increasing pressure from rising prices. Rising consumer prices continued to outpace growth in overall household disposable income, leading to a decline in real (inflation-adjusted) disposable income in the June quarter (Graph 2.11). Real household net wealth also decreased by around 5 per cent in the quarter – the largest quarterly fall since 2008 – as both housing and financial wealth declined. Nevertheless, real household net wealth remained around 20 per cent above its pre-pandemic level, while real household disposable income was 7 per cent higher.

Graph 2.11
Graph 2.11: A two-panel line-bar chart of real quarterly growth in household disposable income and household net wealth, with contributions from nominal growth and inflation. It shows that real growth has been negative for the past couple quarters; rising consumer prices have outpaced growth in household disposable income, while nominal net wealth growth was negative in the most recent quarter.

These pressures on household budgets from rising costs of living and increased interest rates have contributed to a sharp decline in consumer sentiment, which is around the lows observed at the onset of the pandemic and during the global financial crisis. These factors are expected to weigh on household consumption in the period ahead (see chapter on ‘Economic Outlook’).

The labour share of income has been relatively stable outside the mining sector

Despite solid growth in labour income, the labour share of income in the national accounts has declined in recent years. However, this is largely attributable to strong growth in mining profits, which has been driven by increases in the terms of trade. Excluding mining, the labour share of income has been little changed over the past decade, aside from during the pandemic when government subsidies temporarily boosted profits (Graph 2.12). Mining profits are expected to decrease over coming years as the terms of trade reverts to lower levels.

Graph 2.12
Graph 2.12: A two-panel graph showing the share of total factor income attributable to labour income and business profits, including and excluding mining. It shows that the labour and profit shares of income has been stable when mining is excluded.

The outlook for business investment remains positive

Business investment was little changed in the June quarter. Growth in machinery and equipment investment remained elevated, as firms responded to strong demand (Graph 2.13). By contrast, non-residential construction investment declined as capacity constraints and adverse weather limited the pace at which work could be completed.

Graph 2.13
Graph 2.13: A two panel stacked bar graph showing the quarterly chain volume component growth rates of the mining and non-mining sectors. It shows that in the non-mining sector, machinery and equipment growth drove the total increase in business investment, but non-residential construction and other components grew too. For the mining sector, positive machinery and equipment growth was offset by a large decline in non-residential construction and other component growth, to make total mining growth negative.

Survey measures of capacity utilisation and investment intentions point to a positive outlook for business investment. Non-mining capacity utilisation and business conditions remain elevated; capacity utilisation was around its highest level in over three decades in September. Business confidence is around its long-run average, and liaison suggests that firms are generally optimistic about the longer term outlook for demand.

The ABS Capital Expenditure Survey showed that, in aggregate, firms increased their expectations for investment in the 2022/23 financial year, though this may partly reflect elevated input costs (Graph 2.14). Non-mining firms expected to increase investment in machinery and equipment, but revised their intentions for non-residential construction investment slightly lower compared with the previous survey, as capacity constraints and ongoing wet weather are expected to hamper the pace of construction work. Mining firms reduced investment intentions for the current financial year. Liaison suggests that planned investment by the mining industry will largely be to maintain production rather than to expand capacity. Mining firms are also returning much of the earnings arising from elevated commodity prices to investors, rather than reinvesting profits.

Graph 2.14
Graph 2.14: A two panel line bar graph showing the nominal capital expenditure intentions of mining and non-mining firms by financial year in bars, as well as the actual investment outcomes given by the National Accounts as a line. It shows that mining firms have downgraded their capex expectations for the current financial year, compared to their estimate in the March quarter, though they remain above intentions for the previous financial year. Non-mining firms have increased their intentions for the current financial year as well as compared to the previous financial year. The National Accounts outcomes track the shape of the investment intentions bars, but sit above the intentions due to methodological differences in the construction of the capex and national accounts series.

Residential construction activity is continuing to face capacity constraints

A number of factors have combined to slow the pace of residential construction since the start of 2022, including ongoing shortages of labour and materials, adverse weather conditions and illness-related absenteeism (Graph 2.15). The decline in activity in the June quarter was largest for the detached housing sector, reflecting that firms in this sector tend to be smaller project home builders and are more sensitive to supply chain issues affecting the availability of labour and materials. Consistent with this, average completion times rose by about a month in 2021/22. These delays, in combination with higher material costs, have reduced cash flows and contributed to rising insolvencies in the construction sector.

Graph 2.15
Graph 2.15: A two panel line graph showing real residential building work done, measured by dwelling investment in the National Accounts, across different states and across detached and higher-density work done. The graph shows that work done for detached housing declined significantly in June quarter 2022 for New South Wales, Victoria and Queensland. There was a slight increase in higher-density work done across some states, however these increases were small compared to the declines in detached housing.   

Demand for new detached housing has fallen considerably since the start of the year, due to rising interest rates, higher prices for land and construction alongside falling established home prices, and poor buyer sentiment arising from construction delays. Consistent with this, building approvals, new greenfield land sales and new home orders have all declined. Information from the Bank’s liaison program suggests that demand for off-the-plan apartments has also softened of late. Nevertheless, the pipeline of work to be done remains elevated, reflecting the delays associated with constructing the large number of dwellings approved during the pandemic (Graph 2.16).

Graph 2.16
Graph 2.16: A two panel line graph showing the number of dwellings approved, completed, and the pipeline of work to be done of dwellings that have been approved but not completed. It shows that growth in the size of the residential pipeline is slowing, particularly for detached housing where the pipeline has flattened out in recent quarters.

Housing prices have declined further …

National housing prices declined in October, to be 5 per cent lower than the peak in April, alongside rising interest rates and a deterioration in market sentiment; nevertheless, prices are still around 20 per cent higher than at the onset of the pandemic (Table 2.1). Prices have declined across most market segments and geographic areas over recent months and – as is typical of housing price cycles in Australia – especially so in the most expensive segments of the Sydney, Melbourne and Brisbane markets (Graph 2.17). Auction clearance rates and turnover in most capital cities have declined since the beginning of the year, and survey expectations of housing price growth remain low.

Table 2.1: Housing price growth
Percentage change, seasonally adjusted
  October September August July Year-ended Five-year growth
Sydney −1.5 −1.7 −1.9 −1.9 −8.6 10
Melbourne −1.0 −0.9 −1.0 −1.1 −5.6 4
Brisbane −1.8 −1.3 −1.2 −0.5 8.4 36
Adelaide −0.3 0.0 0.1 0.6 16.5 47
Perth 0.0 −0.1 0.1 0.5 4.0 18
Darwin −0.5 −0.0 1.2 0.5 4.9 13
Canberra −1.0 −1.5 −1.8 −1.3 1.0 44
Hobart −1.1 −1.2 −1.4 −0.9 −1.0 52
Capital cities −1.2 −1.2 −1.3 −1.1 −3.1 13
Regional −1.3 −1.0 −1.1 −0.5 6.6 37
National −1.1 −1.2 −1.2 −0.9 −0.9 18

Sources: CoreLogic, RBA

Graph 2.17
Graph 2.17: A two panel line graph showing 6-month-ended annualised housing price growth by dwelling value. It shows that the most expensive houses (in the 75th - 95th percentile by dwelling value) have experienced the largest housing price declines in recent months for both capital cities (top panel) and regional cities (bottom panel). In contrast, housing price growth has slowed down in least expensive segments of the market (5th - 25th percentile). In the middle segments (25th - 75th percentile), price declines have been recorded.

… and the rental market is very tight

Rental vacancy rates have declined in most capital cities and regional areas since the beginning of the year (Graph 2.18). Declines have been largest in Melbourne and Sydney, particularly in the inner and middle suburbs of Sydney, to be around their longer run average levels. In other capital cities, vacancy rates are at or around historical lows. Growth in advertised rents (for new leases) has been strong as a result; CPI rent inflation, which measures rent increases for all leases, has risen in recent months. Recent flooding is expected to place short-term pressure on rental markets and temporary accommodation in flood-affected communities.

Despite the tightness in the rental market and rising rents, average household size has declined to a low level relative to the past quarter-century (Graph 2.19). This suggests the demand for additional space during the pandemic has endured so far, which in turn could be contributing to tight conditions in the rental market. The increase in net immigration following the reopening of the international border is also likely to increase rental demand, particularly in Sydney and Melbourne.

Graph 2.18
Graph 2.18: A two panel line graph showing rental market indicators for Sydney, Melbourne and other capital cities. The top panel shows the vacancy rates for these regions: Melbourne has had a large decline in vacancy rates in recent months, while the vacancy rate for Sydney and other capital cities is near historical lows. The bottom panel shows that advertised rents growth has risen sharply in recent months for all markets. 
Graph 2.19
Graph 2.19: A line graph of the average household size (AHS) in Australia from 1996 to 2022, estimated using microdata from the Labour Force Survey. It shows that there has been a steady decline in AHS over the 1990s, before levelling out. More recently, AHS picked up sharply during COVID-19 related lockdowns, but has subsequently declined and remained low relative to the past two decades. The graph is overlayed with Census estimates of the average household size, from 1996, 2001, 2006, 2011, 2016 and 2021. The graph shows that the Labour Force Survey AHS is consistent with the Census estimate of AHS. 

Public consumption remains elevated

In the June quarter, a sharp decline in real public consumption offset growth in public investment, as the previous quarter’s high level of spending in response to the floods and the pandemic was unwound. Public consumption nonetheless remains at a high level compared with the pre-pandemic period as a share of nominal GDP, supported by public spending programs such as the National Disability Insurance Scheme (Graph 2.20). A strong pipeline of infrastructure projects is expected to support public investment going forward, though labour shortages and elevated capacity utilisation in the construction sector are expected to hamper the pace of work.

The Australian Government Budget October 2022–23 revealed a large upgrade to expected receipts over the next two years, owing to higher commodity prices and the stronger-than-expected labour market. The upgrade to receipts is expected to reduce the budget deficit relative to the estimates in the March Budget (Graph 2.21). Additional funding for aged care and payments to reduce the cost of child care were mostly offset by policies that increase tax revenue.

Graph 2.20
Graph 2.20: A two-panel graph showing the share of public demand in nominal GDP. The left panel shows public consumption as a share of nominal GDP. It shows that public consumption has increased significantly as a share of GDP since the pandemic period but has begun to decline over recent quarters. The right panel shows public investment as a share of nominal GDP. It shows that public investment has remained a constant at roughly 5 per cent of GDP over the past 20 years.  
Graph 2.21
Graph 2.21: A bar graph showing the balance of the Australian government budget. The historical series are presented up to 30 June 2022 and then the forecasts for the next four years as reported in the October budget are shown. Red diamonds show the forecasts budget balance for each year as reported in the 2022/23 March budget. The graph shows significant upward revisions to the budget balance due to high commodity prices and a strong labour market. This moves the forecast budget deficit for 2022/23 from roughly 3.75 per cent of GDP down to roughly 1 per cent of GDP.

Exports remain at a high level …

Export values remained at a high level in the September quarter (Graph 2.22). Rural export values have continued to increase, reflecting strong domestic production and high prices amid tight global supply. Resource exports have been hampered by weather and maintenance disruptions after minimal disruptions in the June quarter. Combined with a sharp increase in import values due to strong demand for overseas travel and the filling of goods order backlogs, this has seen the trade surplus decline in the September quarter.

Graph 2.22
Graph 2.22: A two panel graph showing Australia's trade balance. The top panel is a line graph showing the historically elevated levels of imports and exports, and the bottom panel is a bar graph showing that the trade balance has declined from historic highs in the September quarter.

… while services trade continued to grow

Trade in services continued to recover following the reopening of the international border for vaccinated travellers in late February. Both travel exports and imports rose in the June quarter, reaching 40 per cent of their pre-pandemic levels.

Partial data suggest imports increased in the September quarter, reflecting the strong demand for travel services. Short-term resident returns (an indicator for travel services imports) has grown rapidly over 2022 to date.

On the exports side, the number of visitors to Australia has recovered more slowly (Graph 2.23). Visa lodgement data suggest that foreign demand for education is strong, but student arrivals have been partially constrained by delays in visa processing following the reopening of borders. It will take at least two years for the number of international students in Australia – and so services exports – to recover to pre-pandemic levels.

Graph 2.23
Graph 2.23: A two panel line graph showing the level of travel imports and exports since 2019. It shows that partial data is indicating a faster recovery in travel imports than exports.