Economic growth…but softer beneath the surface


Economic growth in the March quarter in Australia was 0.6% or 2.5% year on year. While this was broadly as expected it highlights that growth in Australia is now running well below its trend pace which is around 3 to 3.25%.
What’s more if you scratch below the surface the economy is actually quite weak. Thanks largely to a sharp fall in capital goods imports the trade sector contributed a very strong 1 percentage point to growth in the March quarter.

In other words, were it not for this growth would have actually been negative. In fact, domestic spending fell for the second quarter in a row leaving Australia in a domestic spending recession.
Growth in demand in the economy was just 1.1% over the last year: housing construction is up 2.7%, but consumer spending is up just 2%, business investment was up just 0.7% and public investment fell. Mining investment has slowed rapidly, but other sectors of the economy are not yet filling the gap. So while headline growth at 2.5% is not too bad the underlying picture is quite weak.
To be sure, forward looking indicators point to a pick up in dwelling construction activity over the year ahead and this in turn should help consumer spending, particularly with the household saving rate remaining very high at 10.6%.

However, the March quarter national accounts also highlight that the Australian economy is likely to require more help going forward as the mining boom continues to fade. Both in the form of lower interest rates from the Reserve Bank and via a further fall in the value of the Australian dollar in order to help boost the competitiveness of sectors like manufacturing, domestic tourism and higher education.
We are looking for more rate cuts from the RBA, and the weak March quarter GDP report adds to the case that the next move will come next month.

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