Inflation not falling fast enough

Inflation continued to fall in the first quarter of 2024, with consumer price growth at 3.6% p.a., and producer prices growing by 4.3% p.a.

However, these inflation figures exceeded market expectations of a slower fall, with inflation rising 1.0% in the first quarter of the year.

They indicate that the “last mile” of inflation will prove especially stubborn and threaten official forecasts for CPI to return to target by end-2025.

Cuts to interest rates are likely to be delayed into late 2024 at the earliest, depending on the strength of the labour market.

Consumers cautious in March

According to ABS data, retail turnover in Australia decreased 0.4% in March 2024.

The decline in March retail revenue was attributable to all industries except for food retailing.

The clothing, footwear and accessories sector faced the largest fall, following a temporary Taylor Swift inspired boost in previous months.  

Per capita retail turnover was $1601 in March. This was preceded by modest increases in January and February. Consumers are cautious of retail spending as cost-of-living pressures remain high.

Living costs hit employees the most

Employee households are currently facing the highest cost of living increases, rising 6.5% p.a. in March.

This suggest underlying cost pressures on employee households are much higher than implied by headline CPI numbers (3.6%). 

Rising interest rates explain these differences, with employee households more likely to be mortgagees. Mortgage interest charges increased to 7.0% in the March quarter up from 5.4% in December quarter.

Broader factors, such as higher insurance premiums, healthcare, food and housing also contributed

Discretionary spending slips again

After some improvements early in the year, household spending growth fell again in March.

Household spending grew 2.1% in the month, its second lowest reading since the pandemic.  

Weaker figures for food, transportation, recreation and culture were the major contributors.

Discretionary spending has been flat or contracting for over a year, while even the growth of non-discretionary spending is now being pulled back.

Poor performance of industrials

According to ABS data, 9 out of 13 sectors had business turnover growth in February.

Consumer sectors had a strong month in February, with most of the top performers being those oriented to consumer markets.

However, industrial sectors performed poorly, with manufacturing, wholesale and technical services all contracting in the month.

Among the three industrial sectors that performed poorly in February, mining was the lowest with a 9.6% contraction.

Capex growth still going strong

New capital expenditure (capex) was 20.5% higher in the December quarter than the year prior.

While mining made a positive contribution, overall levels were still very healthy with non-mining capex growing at a fast 17.8% clip.

The utilities sector experienced a particularly high rate of capex growth (14.5% in the December quarter alone). This was driven by investment in renewable energy infrastructure. 

We are currently enjoying the fastest rate of capex growth Australia has seen in a decade.