GDP details show solid economy

Q2 rose 0.9% q/q after a downwardly revised 0.7% in Q1. This was in line with expectations, although the annual rate was slightly stronger. The details are very solid and show that both domestic demand and net exports contributed 1pp (exports +5.5%q/q) to headline growth and that the drag came from inventories (worth -1.2pp). These data show that the Australian economy was on a strong footing going into Q3 and there is nothing to suggest a change in the RBA’s course.

• On the inflation front, the domestic demand implicit price deflator rose 1.6%q/q to be 4.9%y/y – this was the highest since June 1990. While this data is backward looking, it shows that domestically driven inflation was at multi-decade highs going into the second half of the year. Unit labour costs rose 1.7%q/q but are only up 3%y/y.
• Within domestic demand, household consumption rose 2.2%q/q (boosted by travel and restaurant spending). But the savings rate fell to 8.7% from 11.1%, suggesting that the consumer can remain robust but may have a bit less impetus going forward.
• Private machinery & equipment investment surged 4%. As expected, there was weakness in the construction components (due to wet weather and labour shortages), but overall gross fixed capital formation still managed to increase by 0.2%q/q helped by public investment.
• Both inventories and government spending came in weaker than the data this week had suggested but both had seen strong growth in Q1 and so some payback was not unexpected. Both of these components could bounce back in Q3.