The Experts

Australia’s goldilocks economy

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Another quarter of growth: The record-breaking economic expansion has notched up another quarter of growth. The Australian economy grew by 0.6 per cent in the December quarter after a 0.7 per cent increase in the September quarter. The economy has grown 3.1 per cent over the past year - in line with the longer-term "normal" growth rate. The Aussie dollar lifted from US102.6c to US102.85c in reaction.

Contribution to growth: The biggest contributions to growth came from public investment spending (+1.1 percentage points), followed by net exports (+0.6pp), household consumption (+0.1pp), and dwelling investment. The biggest drag on growth was by private construction & engineering building (-0.8pp), inventories (-0.4pp), and private investment in machinery (-0.2pp).

States & territories: The best description of the performance of States and Territory economies is state final demand plus net exports. The Northern Territory had the fastest annual growth in the December quarter (up a staggering 26.2 per cent), followed by Western Australia (up 12.5 per cent), ACT (up 3.5 per cent), NSW (up 3.4 per cent), Queensland (up 1.5 per cent), Victoria (up 0.1 per cent), Tasmania (down 0.9 per cent) and South Australia (down 1.1 per cent).

Industry sectors: Just five of the 19 industry sectors contracted in the December quarter. Mining, Manufacturing, Construction, Financial & insurance services, Public administration & safety and Health care & social assistance all contributed 0.1 percentage point to GDP growth.

Productivity: Gross value added per hours worked in the market sector rose by 1.0 per cent in the December quarter, lifting annual productivity growth to a solid rate of 3.3 per cent.

Household spending: Eight of the 17 sectors recorded weaker spending in the quarter. Household spending rose by just 0.2 per cent in the December quarter and by 2.8 per cent over the year. Purchase of cars rose by 6.6 per cent in the quarter but purchase of cigarettes & tobacco fell by 4.1 per cent.

Other measures: The household saving ratio eased from 10.3 per cent to 10.1 per cent; a measure of inflation - the household spending implicit price deflator - rose by 0.5 per cent in the quarter and by 2.4 per cent over the year; real non-farm unit labour costs rose by 0.4 per cent in the quarter to be up 1.9 per cent on the year.

What does it all mean?

Australia has a Goldilocks economy – not too hot, not too cold, in fact it's just about right. Why our good economic circumstances aren’t trumpeted more, defies rational explanation. Inflation is under control, unemployment is low, the economy is growing at a “normal” pace and our government deficit and debt levels are low compared with other advanced nations. To top it all off, Australia hasn’t experienced a recession in 21 years.

The clear reason why the Reserve Bank left interest rates unchanged yesterday is because the economy doesn’t need any more stimulus. In fact we believe that interest rates have probably bottomed – if they haven’t completely reached the trough, certainly the low point isn’t far away. We expect cash rates to remain stable until later in the year.

While the composition of growth wasn’t optimum in the quarter, future growth is likely to be more balanced. In the March quarter we would expect household spending, dwellings and private investment to take over the reins from the public sector. Certainly retail sales rose strongly in January, pointing to a stronger contribution from the household sector. Western Australia and the Northern Territory are also doing the heavy lifting work at present with NSW also providing a modest contribution. The aim of state and federal governments should be to achieve more balanced growth across states and territories.

Productivity is no longer a problem, rather a virtue. The workers taken on by businesses over 2010 and 2011 are now clearly more productive. Annual productivity growth now stands at a commendable 3.3 per cent. Of course the challenge is to maintain solid productivity growth into the future.

CommSec expects the Australian economy to grow around its longer-term growth path of 3.0-3.25 per cent over the coming year. The main risks to the economy still lie overseas with other advanced economies – but even on this score there has been a substantial improvement with policy authorities now keen to do what it takes to address problems as soon as they arise rather than let problems fester.







What do the figures show?

National Accounts:

Economic Growth: The economy grew by 0.6 per cent in the December quarter, after an upwardly-revised 0.7 per cent growth in the September quarter. Annual economic growth was steady at 3.1 per cent, in line with the long-term average of 3.00-3.25 per cent.

The non-farm economy grew by 0.6 per cent in the December quarter after a 0.8 per cent rise in the September quarter. Annual growth stands at 3.4 per cent.

Farm GDP fell by 0.8 per cent in the quarter and was down 9.5 per cent over the year.

At current prices, GDP grew by 0.4 per cent in the quarter and by 1.9 per cent over the year.

GDP per person grew by 0.2 per cent in the quarter to be up just 1.2 per cent over the year.

Growth drivers: The biggest contributions to growth came from public investment spending (+1.1 percentage points), followed by net exports (+0.6pp), household consumption (+0.1pp), and dwelling investment. The biggest drag on growth was by private construction & engineering building (-0.8pp), inventories (-0.4pp), and private investment in machinery (-0.2pp).

Inflation: The best measure of domestic price pressures, the household consumption implicit price deflator, was up by 0.5 per cent in the December quarter after a 0.8 per cent increase in the September quarter with annual growth at 2.4 per cent. Real non-farm unit labour costs rose by 0.4 per cent in the quarter and were up 1.9 per cent over the year.

Productivity: Gross value added per hours worked in the market sector rose by 1.0 per cent in the December quarter after rising by 0.4 per cent in the September quarter. Annual growth stands at 3.3 per cent. GDP per hour worked rose 0.7 per cent in the December quarter to be up 3.5 per cent over the year.

The best description of the performance of States and Territory economies is state final demand plus net exports The Northern Territory had the fastest annual growth in the December quarter (up by 26.2 per cent), followed by Western Australia (up 12.5 per cent), ACT (up 3.5 per cent), NSW (up 3.4 per cent), Queensland (up 1.5 per cent), Victoria (up 0.1 per cent), Tasmania (down 0.9 per cent) and South Australia (down 1.1 per cent).

Consumers are spending modestly. Household consumption rose by 0.2 per cent in the December quarter, after gains of 0.2 per cent in the September quarter and 0.7 per cent in the June quarter. Annual growth stands at 2.8 per cent. Strongest growth of spending in the quarter was recorded by Purchase of vehicles (up 6.6 per cent), followed by Health (up 2.0 per cent). Eight of the 17 sectors recorded weaker spending in the quarter led by Cigarettes & tobacco (down 4.1 per cent).

Detailed consumer spending data. The ABS provides detailed consumer spending data, but just in original (not seasonally adjusted or trend) terms. Over calendar 2012, real household spending grew by 3.2 per cent with prices up 2.2 per cent. In other words spending rose 5.4 per cent in nominal terms. Consumers outlaid 22.9 per cent more on “medicines, medical aids and therapeutic appliances”, 19.2 per cent more on electricity & gas and 7.7 per cent more on water and sewerage rates. Gambling also rose by 7.4 per cent. Consumers spent less on newspapers & books (down 2.4 per cent).

Industry sectors: Just five of the 19 industry sectors contracted in the December quarter. Mining, Manufacturing, Construction, Financial & insurance services, Public administration & safety and Health care & social assistance all contributed 0.1 percentage point to GDP growth.







Other points:

Profit share at 8-year low. In seasonally adjusted terms, the ratio of profits to total factor income fell from 27.1 per cent to an eight-year low of 26.3 per cent in the December quarter. The wages share rose from 54.2 per cent to 54.8 per cent in the December quarter.

Household savings ratio fell. The household saving ratio fell from 10.3 per cent to 10.1 per cent, in seasonally adjusted terms in the December quarter. In trend terms household saving rose from 10.3 per cent to 10.2 per cent.

Imports rose as a share of spending. The imports to sales ratio rose from 0.362 in the September quarter to 0.366 in the December quarter.

The inventory to sales ratio was unchanged at 0.628 in the December quarter.





What is the importance of the economic data?

The quarterly National Income, Expenditure and Product release (national accounts) from the Bureau of Statistics is the most complete assessment of Australia’s economic performance. Detailed estimates are provided on incomes (wages, profits), spending (such as household, dwelling investment and trade (exports and imports) and production (comparing industry performance). Other data includes household saving and the economic performance of States and Territories.

The main use of the national accounts figures is as a historical record of economic performance. The information has little forward-looking value for currency, interest rate or share markets.

What are the implications for interest rates and investors?

The national accounts data is backward looking. Since the December quarter finished, data has showed a lift in consumer confidence and consumer spending as well as a solid lift in job advertisements. Further, there have also been more settled conditions in advanced economies with sharemarkets posting solid gains.

Clearly the Reserve Bank is forward looking and there are good reasons for the Bank to stay on the interest rate sidelines at present. While the Reserve Bank indicates that it has the ability to cut rates should stimulus be required, we don’t expect it to act on the easing bias.

There are clearly big differences across state and territory economies. The latest data is very consistent with CommSec’s latest State of the States report. Western Australia and Northern Territory are doing well; Tasmania and South Australia are struggling.







 

Published: Wednesday, March 06, 2013

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