The Reserve Bank of Australia is facing more pressure to make a larger move on interest rates after new data revealed broadening inflation pressures as the national economy expanded through the first three months of the year despite the lingering effects of Omicron and floods.
The economy expanded by a better-than-expected 0.8 per cent in the March quarter, the Australian Bureau of Statistics reported on Wednesday, with household spending continuing to improve from its pandemic lows while governments lifted expenditure to deal with the pandemic and to provide for military support in flood-affected parts of NSW and Queensland.
It took annual growth to 3.3 per cent while nominal growth – which tracks economic activity not adjusted for inflation – grew by 10.2 per cent over the past year.
Despite the relatively strong set of figures, Treasurer Jim Chalmers said the Labor government has inherited an “incredibly challenging set of circumstances”.
“Skyrocketing inflation is a big challenge. Falling real wages is a big challenge. The impact of interest rate rises that the Reserve Bank Governor has flagged a big challenge,” he said.
One of those challenges is inflation. The national accounts’ broadest measure of inflation, the GDP implicit price deflator, rose by 2.9 per cent through the quarter, its highest level since 1988.
In the Reserve Bank board June meeting, with markets putting the chance of a 0.4 percentage point rise at 80 per cent.
The March quarter covered the period when much of southern Queensland and northern NSW was hit with deadly floods. Treasury had expected this to cut growth by around 0.25 per cent.
The ABS found not only had the economy grown through the floods but also defied the Omicron variant outbreak that hit many businesses through the period.
Household spending contributed 0.8 percentage points to growth through the quarter while government spending added 0.6 percentage points.
Spending on discretionary goods and services rose by 4.3 per cent and is now back above pre-pandemic levels for the first time.
Spending on transport jumped by 60 per cent, due to the re-opening of state and international boundaries, while expenditure on recreation and culture (4.8 per cent) and restaurants (5.3 per cent) were also strong. Supply constraints eased on imports of new cars, contributing to a 13 per cent increase in spending.
Expenditure on essentials actually declined by 0.2 per cent. Spending on food dropped by 2 per cent as people were able to eat out at cafes and restaurants. Spending on health also fell.
While the economy expanded by 0.8 per cent, GDP per capita grew by a much more modest 0.3 per cent. It is the widest gap between the two measures since early 2018.
At the state level, the domestic Victorian economy expanded by a national-best 2.4 per cent in the quarter thanks to large rises in household and government spending.
State final demand in both Western Australia and the Northern Territory jumped by 2.2 per cent while in NSW it rose by 1.2 per cent and in Queensland by 0.8 per cent.
Spending on defence rose 5.6 per cent in the March quarter as Defence was called in to provide flood assistance.
Defence spending in NSW and Queensland rose a combined 7.8 per cent while in the rest of the country it was 3 per cent.
Insurance claims rose dramatically due to the floods. Non-life insurance claims rose 18.6 per cent in the March quarter, with $2.8 billion paid out due to the natural disasters. The ABS expects the rebuilding effort to contribute to future GDP figures.
