(ISSN Digital 2208-0325)
The 2022/23 year in review
With key economic data for the last financial year
now released, this issue of Plain English
Economics provides a summary of the state of
the Australian economy in 2022/23.
Economic Growth
Key Statistic: Real GDP up 2.1% between
June 2022 and June 2023.
Following a V-shaped recovery after the COVID
crisis, Australia’s economic growth has been
maintained at a moderate pace. Real Gross
Domestic Product (GDP) at the end of June 2023
was 2.1% above the level of one year earlier.
With the latest annual population growth
estimate of 2.4%, the rate of GDP growth per
capita (person) was negative 0.3% in the year to
June 2023. As shown on the chart below, GDP is
currently at a similar level to that prevailing in the
years prior to the COVID crisis. It is, however,
below the longer-term average of approximately
3.1% per annum, despite the higher-than-normal
rate of population growth.
Source: Australian Bureau of Statistics 5206
The COVID crisis and associated business
shutdown & reopening have been the key
influence on recent economic growth patterns.
The shutdowns resulted in falling production as
well as a contraction in domestic demand. These
Published by Plain English Economics Pty Ltd.
Volume 30 Issue 9 September 2023
declines were concentrated in the March and
June quarters of 2020, with the next 4 quarters
showing a strong recovery.
The largest component of domestic demand,
household consumption, was 1.5% higher in the
June 2023 quarter than it was one year earlier in
real terms. Growth in consumption spending has
slowed following the strong rebound that took
place immediately following the COVID crisis
period. Higher interest rates, which constrain the
disposable income available to households with
borrowings, are likely to be one factor
responsible for the relatively low rate of growth
in consumption spending.
Also showing an impact from higher interest
rates is the housing sector, with dwelling
construction falling by 1.1% in the year to June
2023. This is despite the tight conditions in the
residential housing market, which have kept
housing prices relatively high and vacancy rates
near record lows. However, the cost of funding
borrowings for new residential housing
development has risen sharply and contributed
to the growth rate in new construction dropping
back sharply.
Business investment is showing less impact from
higher interest rates. After contracting in the
COVID crisis, business investment has recovered
strongly and was 8.0% higher in the latest
financial year. This expansion in business
investment may assist in creating additional
capacity for higher production in future periods
and addressing the recent deterioration in
productivity. With economic output increasing by
less than the expansion in hours worked over the
past 12 months, there has been a sharp decline in
productivity.
Following a period of uninterrupted growth since
2011, the volume of exports went into decline
upon the commencement of the COVID crisis.
Lower overseas demand resulted in declines
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across most categories of exports, with service subsequent quarters. The latest data for June
exports (e.g. education & tourism) being 2023 shows the percentage of household
particularly impacted by border closures. disposable income that was saved and not spent
However, since the COVID crisis period, volumes on consumption was 3.2%. This is down sharply
have recovered strongly. In the year to June from a cyclical high of 23.6% in the COVID crisis.
2023, export volumes rose by 9.8%, accounting
for nearly half of the overall rise in Australia’s
output over that period. The return of tourism
has been an important contributor, with service
exports jumping 50.1% over the past 12 months.
Although iron ore continues to dominate export
receipts, favourable weather conditions have
seen a strong pick up in rural exports, which have
increased 9.9% over the past year and are some
33.4% above pre-COVID levels.
Source: Australian Bureau of Statistics 5206
Movements in import volumes generally reflect
trends in domestic spending, with volumes Q1: Describe how the rate of Australian economic
jumping 4.4% over the year to June 2023. With growth has changed over the past 4 years.
overseas travel by Australians recommencing,
Q2: Explain why the household savings ratio has
service imports jumped 22.9% over the past year, declined over recent quarters.
but remain 21.3% below the level recorded 4-
years ago. In contrast, consumption and capital Employment
(investment) imports are more than 20% above
the levels of 4 years earlier, highlighting the Key Statistic: Unemployment rate of 3.7%
strength of recovery in spending within the as at August 2023.
Australian economy following the COVID crisis.
Australia’s unemployment rate was 3.7% in
Public sector demand has been the most August 2023, which is well below a cyclical high
consistent of the main spending categories over of 7.5% recorded in July 2020. It is also below the
recent years. It should be noted that the large 5.1% recorded prior to the COVID crisis at the
transfer payments made to businesses and end of 2019.
households as part of the COVID assistance
packages are not measured as government
consumption (but would count as household
consumption if spent by households). Over the
year to June 2023, public sector spending rose
2.7%, which is below its average growth rate of
5.1% over the last 5 years.

Boosted by government transfer payments,

household incomes increased significantly
following the commencement of the COVID crisis
and then gradually moderated as the economy
normalised. However, over the past 12 months,
real household disposable income has actually
fallen by 3.0%, as income levels have grown more
slowly than inflation. This current period of
decline is the first fall in real disposable income
recorded since 2012.
Much of the boost to household income during
the COVID lockdown period was saved rather
than spent. As a result, the Household Savings
Ratio increased sharply, before declining in
Source: Australian Bureau of Statistics
The rise in unemployment during to the COVID
lockdowns of 2020 was significant, but not as
large as may have been expected given the fall in
economic activity. Unemployment appears to
have been moderated by the Government’s Job
Keeper program.
Movements in the workforce participation rate
(i.e. the percentage of adults either employed or
seeking employment) may have also helped
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stabilise unemployment over recent years. After
being historically high at 66.1% at the start of
2020, Australia’s participation rate dropped
sharply to 62.5% in May 2020. This decline in
participation during the COVID crisis is likely to
reflect a tendency for some displaced workers to
take “time off” and not seek re-employment at
the onset of the crisis. However, workforce
participation has recovered strongly in the post
crisis period. In August 2023, the participation
rate was 67.0%, which is a record high.
The number of workers employed has increased
by 3.0% over the year to August. Although this
rate of increase has moderated from 5.3% one
year earlier, the growth in employment remains
robust and has closely matched the strong
increase in the size of the workforce as a result of
the current high population growth rate
generated from a recent lift in immigration. This
increase in employment has led to some
decrease in job vacancies, which were at record
highs following the COVID crisis period and
remain at levels well above longer term averages.
A further indication of labour market strength
has been a decline in the underemployment rate.
Underemployed workers are those employed
people who want, and are available for, more
hours of work than they currently have. The
underemployment rate was 6.6% in August 2023,
which is well below the peak of 13.7% recorded
in April 2020; and also below the 8.2% level
existing prior to the COVID crisis.
Q3: Identify two indicators that demonstrate the
current strength of the Australian labour market.
Inflation
Key Statistic: CPI increased 6.0% in the year
to June 2023.
After briefly being in negative territory in mid-
2020, Australia’s Consumer Price Index (CPI) has
bounced back to be positive 6.0% in the year
ended June 2023. The level of inflation prevailing
over the past 18 months has been elevated and
well above historical averages.
In addition to the current high “headline”
inflation result, “Underlying Inflation” (calculated
by removing the more volatile or large one-off
category movements) is also well above average
at 5.7%. This is outside the Reserve Bank’s (RBA)
medium term 2% to 3% target range. As
indicated on the chart below, underlying inflation
was consistently below the central bank’s target
range prior to the COVID pandemic and rose
sharply in the period after the crisis.
Source: Australian Bureau of Statistics
The post COVID spike in inflation reflects global
and domestic factors. Globally, surging energy
prices, which have been exacerbated by the
military conflict between Russia and Ukraine,
have contributed. Locally, expansionary
monetary and fiscal policy put in place during the
COVID crisis have boosted demand pressures on
inflation. This, combined with COVID-related
supply constraints on various goods and services,
has contributed to higher inflation.
Despite tight labour market conditions, however,
there has been very little upward pressure on
inflation from wages growth. As shown on the
above chart, the Wage Price Index has risen by
3.6% in the year to June 2023. This is well below
underlying inflation, implying real wages have
fallen. However, there has been some increase
on the record low 1.4% annual wage growth
reached in the second half of 2020.
Q4: Identify two factors that are likely to have
contributed to Australia’s underlying inflation
increasing sharply over the past 2 years.
External Accounts
Key Statistic: Current Account surplus was
$30.4 billion in the 2022/23 financial year,
which was 1.2% of GDP.
Australia has maintained a surplus on its Current
Account over the past year. The $30.4 billion
surplus recorded in 20222/23 was, however,
below the $43.3 billion surplus of the previous
financial year. The Current Account shifted from
a deficit to surplus in June 2019, representing the
first surplus position since 1975.
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 Over 2022/23, receipts from the export of goods
increased 10.8%. However, this was offset by
higher payments for imports of 13.1%. None-the-
less, the Balance on Merchandise trade remained
in a healthy surplus of $152.9 billion.
Source: Australian Bureau of Statistics
The positive balance on Merchandise Trade
Account has been maintained despite a decline in
the Terms of Trade Index (the ratio of export
prices to import prices), which dropped from
119.9 to 104.7 points in the year to June 2023.
None-the-less, the Terms of Trade remains at
relatively high levels, with commodity prices still
elevated compared to much of the previous
decade.
After being in surplus in the COVID crisis period,
the Services Account has moved back into deficit
over the past 2 years. In 2022/23, the Services
Account deficit totaled $13.3 billion. During the
COVID crisis, border closures restricted the travel
of Australians to overseas venues, which sharply
reduced service imports. This more than offset
the decline in service exports from inbound
tourism and education – thereby creating a
surplus on the Service Account, which has now
been reversed.
The Net Incomes deficit has expanded sharply
over the past two years and was $109.2 billion in
2022/23. A combination of rising interest rates
payable on Australia’s foreign debt, and high
dividend payments by many Australian
companies to overseas shareholders, has
contributed to the rise in the income deficit.
With Australia’s Current Account in surplus, the
reliance on foreign borrowings to balance the
external accounts has been removed. As a result,
foreign debt has fallen as a percentage of GDP
from 50.2% to 46.3% in the year to June 2023.
Q5: Explain why Australia’s Service Account has shifted
from surplus to deficit over the past two years.
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Monetary Policy
Key Statistic: Cash rate at 4.1% (Sep 2023).
Following a period of exceedingly loose monetary
policy when the overnight cash interest rate was
held at an “emergency” low level of 0.10%,
monetary policy has been progressively tightened
from May 2022 onwards. As of September 2023,
the cash interest rate had increased to 4.1%.
When the economy recovered strongly out of the
downturn associated with the COVID crisis, the
need for exceptionally low interest rates was
removed. In addition, more recently, higher
inflation has necessitated a response by the
central bank to lift interest rates to dampen
demand pressures on inflation.
In addition to the program of interest rate
increases from May 2022, the RBA also ceased its
“Quantitative Easing” bond purchase program in
February 2022 and discontinued its 0.10% target
for the April 2024 government bond yield in
November 2021. These measures had been put in
place to keep interest rates low across the yield
curve.
Fiscal Policy
Key Statistic: In 2023/24, the expected
Commonwealth deficit is $13.9 billion (or 0.5%
of GDP). This follows an actual surplus of $22.1
billion (or 0.9% of GDP) in 2022/23.
Fiscal policy has played a key role in seeking to
neutralise the impact of the COVID crisis on the
economy. The crisis triggered a sharp
reduction in taxation and need for immediate
expansion in government expenditure. Key
expenditure measures included the Job Keeper
program, the JobSeeker supplement,
household support and business support
payments. These expenditures were wound
back as the economy normalised. The budget
position then improved rapidly and reached a
surplus position in 2022/23.
However, expectations are for the
Commonwealth Government’s budget to be
back in deficit in 2023/24, as economic growth
slows and some of the benefits of higher Terms
of Trade on tax revenue are reversed.
Nonetheless, relative to the size of the
economy, movements in the budget position
are small and fiscal policy could be described as
currently being relatively neutral.