Statement on Monetary Policy – August 20232. Domestic Economic Conditions

The labour market remains tight, though the balance between labour supply and demand has improved since late 2022. Strong growth in the working-age population has continued to support employment gains over the first half of 2023. By contrast, economic activity was subdued as high inflation, higher interest rates and earlier declines in wealth weighed on growth. GDP growth has slowed considerably since mid-2022 and GDP per capita declined in the March quarter. Consumption growth was weak in recent quarters and timely indicators suggest it continued to be so in the June quarter. Headwinds to real household income growth remain, but the recent increase in housing prices has supported household wealth.

Measures of spare capacity in the labour market remain near multi-decade lows but have started to ease

The labour market was tight during the first half of 2023, though a broad range of measures suggest that the labour market is not as tight as it was in late 2022. The unemployment rate has been near its 50-year low of 3½ per cent since mid-2022 and is below 4 per cent in most states. The medium-term unemployment rate – a measure of cyclical unemployment that typically has the closest relationship with wages growth – has increased slightly in recent months but remains very low (Graph 2.1). The long-term unemployment rate has continued to decline to be around its lowest level in decades; much of the decline over recent years has been driven by long-term unemployed people finding jobs. More recently, there has been an increase in the share of long-term unemployed people leaving the labour force.

Graph 2.1
A line graph showing that short, medium and long-term unemployment rates remain around multi-decade lows. The medium-term unemployment rate has ticked up slightly in recent months.

Broader measures of labour underutilisation have increased a little in recent months, consistent with the balance between labour demand and supply improving, but they remain near multi-decade lows (Graph 2.2). An increase in the underemployment rate (people with jobs but working fewer hours than they want) has driven most of the increase in these broader measures, though it likewise remains close to its lowest level in several decades.

Graph 2.2
A line graph showing the hours-based unemployment rate, underemployment rate and the underutilisation rate. While all 3 series are near multi-decade lows, they have increased slightly in recent months.

Tight labour market conditions also manifest through higher job mobility (when a person changes jobs). Actual and expected job mobility have declined in recent months to levels observed immediately prior to the COVID-19 pandemic. Actual job mobility is around pre-pandemic levels in most industries but remains slightly elevated in healthcare. The share of people leaving their jobs voluntarily has declined but remains above pre-pandemic levels; messages from firms in the Bank’s liaison program suggest that the rate of job turnover has also declined relative to last year (Graph 2.3).

Graph 2.3
A line graph showing the share of employed persons leaving their jobs voluntarily, excluding retirement (the quits rate). The quits rate has declined but remains above pre-pandemic levels.

More people have a job than ever before

Employment growth remained robust in the June quarter, broadly keeping pace with strong growth in the working-age population and resulting in a record high employment-to-population ratio (Graph 2.4). More than one million people have found jobs since February 2020.

Graph 2.4
A line graph of the employment-to-population ratio and participation rate starting from the late 1970s. Both series are around historical highs.

Strong labour demand has encouraged people to enter the workforce, with the participation rate remaining near its record high in recent months. Women and young people have driven the increase in participation since the start of 2020. Strong population growth has contributed to labour supply, as arrivals from overseas have increased to around pre-pandemic rates and fewer people than usual have departed the country (Graph 2.5).

Graph 2.5
A line graph showing year-ended working-age population growth, defined as persons aged 15 years and over. The working-age population has been growing faster than in the years preceding the pandemic.

People increasing their average hours worked and taking on second jobs have also played an important role in the adjustment of labour supply to strong demand over recent years. Full-time employment has accounted for all of the increase in employment since early 2020 (Graph 2.6). The share of employed people holding more than one job has increased to a record high of 6.6 per cent.

Graph 2.6
A 2-panel line graph showing the cumulative change in full-time and part-time employment since February 2020 and the multiple-job holding rate among employed persons. Full-time employment has accounted for all employment growth since immediately before the pandemic and the multiple job holding rate is at a record high.

Measures of job advertisements and vacancies have moderated since mid-2022 but remain much higher than prior to the COVID-19 pandemic. There are still nearly as many vacancies as unemployed people, even as the number of vacancies has declined (Graph 2.7). Firms in the Bank’s liaison program have reported an improvement in labour availability in some sectors, with some linking this to the arrival of foreign workers, though finding suitable labour continues to be difficult. Hiring intentions of firms in the Bank’s liaison program have also eased since mid-2022.

Graph 2.7
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 remain at very high levels and there are nearly as many job vacancies as there are unemployed people. However, both series are below the peaks reached in mid-2022.

Domestic activity growth continued to moderate in the first half of 2023

Growth in the Australian economy has slowed significantly since mid-2022 (Graph 2.8). GDP growth in the March quarter was well below the pre-pandemic average as cost-of-living pressures, higher interest rates and earlier declines in wealth weighed on household incomes and consumption growth. The household saving ratio also declined to below its pre-pandemic decade average (Graph 2.9).

While consumption growth remained subdued and dwelling investment declined, growth in domestic demand in the quarter was resilient due to strong growth in business investment. The post-pandemic rebound in international students and tourists continued to boost net exports; this was more than offset by a bounce-back in goods imports as supply chain issues eased, particularly for passenger vehicles and telecommunications equipment. Timely indicators suggest domestic activity will remain subdued through mid-2023.

Graph 2.8
A line and bar chart showing GDP growth with contributions by components. It shows that GDP growth has been slowing since mid-2022, with GDP growth below the pre-pandemic average. 
Graph 2.9
A line graph showing the household net saving ratio, calculated as the difference between household disposable income and consumption, net of depreciation, from 1993 to now. It shows that the net saving ratio continued its decline in the March quarter. 

Population growth outpaced output growth in the March quarter and so GDP per capita declined (Graph 2.10). In nominal terms, the economy continued to grow strongly in the quarter, driven by growth in domestic prices and the terms of trade.

Graph 2.10
A line and bar chart showing nominal GDP growth with contributions. It shows that nominal GDP growth remained elevated in the March quarter, with large contributions from prices and population growth. Real GDP per capita declined slightly in the March quarter.

There have been several headwinds to household spending …

Real household disposable income in the March quarter was 4 per cent lower than a year ago (Graph 2.11). Real incomes have been weighed down by continued high inflation, strong growth in tax payments and higher net interest payments, as well as declines in small business incomes (led by decreases in the farm sector). These factors were partly offset by strong growth in labour income. Real household net wealth decreased by 8 per cent over the year to March, driven by lower housing prices.

Graph 2.11
A line and bar graph showing year-ended real growth in household disposable income growth, with contributions by component. The components include labour income, other net income, net interest payable, tax payable, and prices. It shows that high inflation, and interest and tax payable were large drags to income growth in the March quarter 2023

While higher interest rates have weighed on aggregate household disposable income, the effects are being felt unevenly. Households that are net savers are receiving higher returns on their deposits, which is boosting their disposable income, while households that are net borrowers are facing higher interest payments (Graph 2.12). Aggregate interest receipts and payments will increase over the year ahead as the effect of earlier increases in the cash rate continue to be passed through to interest rates faced by households (see Chapter 3: Domestic Financial Conditions).

Graph 2.12
A line and bar graph showing household net interest income broken down into interest receivable and interest payable components as a share of disposable income. It shows that interest payable is still larger than interest receivable in the March quarter 2023.

Growth in household consumption has been weak

Household consumption growth has slowed materially since mid-2022, with average growth of only ¼ per cent in recent quarters. This is well below the pre-pandemic average. The slowdown has been driven by weaker consumption growth for discretionary items (Graph 2.13). A range of timely indicators suggests that household consumption growth remained subdued in the June quarter. Retail sales values increased a little in the quarter but have been broadly unchanged since late last year; sales have been declining in real terms over this period (Graph 2.14). These outcomes are consistent with the weak conditions reported in liaison (see Box B: Insights from Liaison).

Graph 2.13
A line and bar chart showing household consumption growth with contributions. It shows that consumption growth in the March quarter was underpinned by consumption of essential goods and services with a partial offset from a decrease in discretionary spending.
Graph 2.14
A line chart showing monthly nominal retail sales and its 3-month moving average. It shows that retail values remain subdued and are broadly unchanged from their September 2022 level.

Sales of new cars have been relatively resilient to the softness in consumer spending. Cars are one of the categories of consumption most sensitive to changes in housing wealth; however, a large backlog of orders, as a result of earlier supply chain issues, has supported sales even as household wealth has declined. Car sales to households have remained strong in recent months, supported by orders that were placed several months earlier. Wait times for some models remain much longer than before the pandemic, although the ongoing easing in supply constraints could see more demand realised in sales in coming months.

Despite slowing growth, household consumption per capita was close to its pre-pandemic trend level in the March quarter when excluding international travel (Graph 2.15). Nominal spending by Australian tourists overseas has picked up in recent months but remains around 20 per cent below pre-pandemic levels; real spending is even further below pre-pandemic levels because of strong price increases since 2019.

Graph 2.15
A 2-panel line chart showing the consumption of goods and services separately, relative to its 2014-2018 trend. It shows that spending on both goods and services, excluding international travel, is broadly in line with their respective trends.

In contrast to the subdued growth in Australians’ spending overseas, the recovery in international tourists and students coming to Australia continued to support economic activity (spending by tourists and students is treated as services exports rather than consumption in the national accounts). A large number of people entered the country to commence their studies in early 2023; the total number of international students in Australia is back to around pre-pandemic levels (Graph 2.16). Inbound tourism has also increased further in recent quarters but remains below the levels seen prior to the pandemic, because of fewer tourists from China and constrained airline capacity.

Graph 2.16
A line graph showing short-term visitor arrivals and student visa holders onshore. Both series grew sharply from early 2022. Student visa holders are around pre-pandemic levels, while short-term visitor arrivals are still well-below pre-pandemic levels.

The rebound in housing prices is supporting household wealth

National housing prices have increased over recent months, following an 8 per cent decline from the April 2022 peak (Graph 2.17, Table 2.1). These increases have been broadly based across capital cities and most regional areas and have provided support to household wealth. The rebound in housing prices reflects a combination of stronger demand, partly due to the pick-up in population growth, and ongoing limited supply of new and established dwellings.

Other measures of housing market activity have been mixed in recent months. Housing turnover and residential listings are at low levels, although new listings have increased in some capital cities in recent months and auction clearance rates are higher than at the start of the year. Survey measures of housing price expectations have risen to be above their long-run average.

Graph 2.17
A 2-panel line graph showing housing prices across the 5 major capital cities and for combined regional areas, indexed to 2013. The graph highlights the recent turnaround in house prices across the capital cities, led by Sydney, with a more muted turnaround in regional areas to date.
Table 2.1: Growth in Housing Prices
Per cent, seasonally adjusted
  July June May Since recent peak Year-ended Since Feb 2020
Sydney 1.3 1.5 1.3 −8 −2.3 16
Melbourne 0.6 0.8 0.6 −8 −4.1 3
Brisbane 1.5 1.1 0.9 −7 −6.4 31
Adelaide 1.3 0.9 0.6 0 0.9 46
Perth 1.1 1.0 1.0 0 3.2 29
Darwin 0.2 0.1 0.5 −2 −1.2 30
Canberra −0.2 0.2 0.3 −9 −8.0 26
Hobart 0.2 −0.6 −0.2 −13 −11.5 19
Capital cities 1.1 1.2 1.0 −5 −2.8 16
Regional 0.5 0.5 0.3 −6 −5.7 33
National 1.0 1.0 0.9 −5 −3.5 20

Sources: CoreLogic; RBA.

The rental market remains very tight

Rental vacancy rates remain below their long-run average levels in Melbourne and Sydney and are around record lows in most other capital cities. Strong population growth has added to demand for rental properties, particularly in Sydney and Melbourne. Average household size has increased over recent months in capital cities, likely reflecting tight rental market conditions; this partially unwinds the decline in average household size observed since the onset of the COVID-19 pandemic (Graph 2.18). Average household size outside of capital cities has already returned to pre-pandemic levels.

Graph 2.18
A line graph showing how average household size has evolved for the combined capital cities and the rest of Australia since 1998. The graph shows that average household size has increased in capital cities recently, reversing only part of the decline observed during the pandemic. Average household size is around pre-pandemic levels in the rest of Australia.

Growth in advertised rents (for new leases) has been strong in capital cities, with advertised rents rising at their fastest pace in at least two decades in Sydney and Melbourne (Graph 2.19). By contrast, advertised rents growth has eased in most regional areas over the past year. Rents have grown more strongly for units than houses. Rental yields remained above pre-pandemic levels in all capital cities, though they have declined for Sydney and Brisbane in recent months as increases in housing prices have outpaced growth in rents.

Graph 2.19
A 4-panel line graph showing advertised rents in New South Wales, Victoria, Queensland and Western Australia, split by capital city and rest of state. The graph shows that advertised rents growth is strong in capital cities, while most states have seen growth ease outside of their respective capital cities.

Capacity constraints continue to weigh on dwelling investment

Dwelling investment has declined by 5 per cent over the past year (Graph 2.20). While constraints on the supply of materials have eased, poor availability of tradespeople – particularly for the latter stages of construction – has continued to limit the pace of work done. These delays have contributed to the elevated pipeline of residential construction and, along with substantial increases in costs, have reduced cash flows for some firms and increased insolvencies in the industry over the past year. Construction insolvencies in the June quarter were at their highest level since the series began in 2013.

Graph 2.20
A 2-panel line graph showing private dwelling investment on the left panel and splitting it out into components on the right panel. The left panel shows total dwelling investment declining. The right panel shows this was driven by declines in higher density activity, as well as alterations and additions, while detached activity was broadly flat in the March quarter. 

Demand to purchase new detached dwellings has remained weak. Indicators such as building approvals, greenfield land sales and new home sales remained steady at low levels in the June quarter. Builders in the Bank’s liaison program point to a range of factors weighing on demand, including higher interest rates, uncertainty around the cash rate path, higher construction costs and poor buyer sentiment due to construction delays and insolvencies. The recent weakness in demand for new detached dwellings is expected to weigh on dwelling investment once the backlog of dwelling construction is worked through (Graph 2.21).

Graph 2.21
A 2-panel line graph showing approvals and completions on the left panel and the residential pipeline, decomposed into higher density and detached, on the right panel. The left panel shows that approvals remain at low levels while completions have picked up a little. The right panel shows the pipeline of buildings to be completed remains elevated for both higher density and detached dwellings.

Business investment remains strong but sentiment continues to ease

Business investment has increased strongly over the past year (Graph 2.22). Investment in machinery and equipment drove the pick-up in investment in the March quarter, reflecting strength in the agricultural, manufacturing, mining and transport sectors. Non-residential construction investment also increased, driven by expenditure on renewable and electricity projects in the eastern states.

Graph 2.22
A line bar graph showing contributions by type to year-ended growth in private business investment. Over the past year, private business investment has grown strongly, with all types of investment increasing.

Survey measures of investment intentions generally point to a positive short-term outlook for business investment, although the medium-term outlook has weakened. Measures of business conditions have softened further over recent months and business confidence is a little below its long-run average. The ABS Capital Expenditure Survey showed that, in aggregate, firms have revised down their expectations for investment in the 2023/24 financial year and nominal investment intentions are similar to 2022/23 (Graph 2.23). Information from the Bank’s liaison program suggests that some firms anticipate delays to investment projects resulting from labour shortages, and some small firms are focusing on conserving cash rather than investing.

Graph 2.23
A 2-panel line bar graph, with bars showing nominal capex intentions for machinery and equipment, and buildings and structures by financial year, and lines showing investment outcomes from the national accounts. The graph shows that, in aggregate, investment intentions for machinery and equipment are slightly lower in the 2023/24 financial year than 2022/23, but are higher for buildings and structures over the same period. The national accounts outcomes track the shape of the investment intentions bars, but sit above intentions due to methodological differences in the construction of the capex and national accounts series.

Public demand growth has slowed

Public demand growth continued to slow in the March quarter as health expenditure associated with the COVID-19 pandemic continued to wind down (Graph 2.24). Public consumption as a share of nominal GDP remains at a high level compared with the pre-pandemic period, supported by public spending programs such as the National Disability Insurance Scheme and aged care. A large pipeline of infrastructure projects is expected to support public investment going forward.

Graph 2.24
A 2-panel line graph showing public consumption and public investment as a share of nominal GDP. Public consumption has declined from high levels during the COVID-19 period while public investment has remained steady.

The 2023/24 Australian Government Budget and various state budgets have reported an upgrade in the consolidated underlying cash balance in 2022/23 and smaller projected deficits over coming years (Graph 2.25). Higher commodity prices and a stronger-than-expected labour market have driven the improvement in budget positions.

Graph 2.25
A stacked bar graph showing the consolidated government underlying cash balance and its contributions from the federal, state and territory governments. The graph shows Treasuries’ previous and current forecasts of the underlying cash balance. The most recent budgets show an upgrade to the consolidated underlying cash balance. 

Resources exports have been volatile in recent quarters

Net trade detracted slightly from GDP in March, as strong growth in goods imports more than offset growth in services exports (Graph 2.26). While rural exports rose following an exceptional year of growing conditions, this was offset by weakness in coal exports due to maintenance disruptions in the March quarter. Information from port authorities and trade data indicate that coal exports rebounded in the June quarter, with thermal coal exports to China returning to pre-pandemic levels.

Graph 2.26
A 3-panel graph showing the growth in goods exports and imports, services exports and imports, and net trade’s contribution to GDP growth. In the most recent period, good imports increased by more than good exports while service exports increased by more than service imports. Overall, net trade’s contribution to GDP growth was negative in the March quarter.

Lithium export values have increased substantially in recent years to be Australia’s fourth largest mineral export (behind coal, iron ore and gold) (Graph 2.27). The increase in lithium export values has been driven by higher prices on the back of increasing demand for batteries; export volumes have also increased as new mines have commenced production.

Graph 2.27
A line graph showing that exports of lithium have increased substantially over the past 2 years.