Australia completes 24th consecutive year of growth

National accounts

• Slower growth: The Australian economy grew by 0.2 per cent in the June quarter after a 0.9 per cent increase in the March quarter. Forecasts had centred on 0.4 per cent growth in the economy. The economy hasn’t experienced a recession for 24 years.
• The economy has grown 2.0 per cent over the past year, below the decade-average growth rate of 2.8 per cent and below the 15-year average of 2.9 per cent.
• Contribution to growth: The biggest contributions to growth came from government consumption (+0.4 percentage points), followed by household consumption expenditure (+0.3pp), and public investment (+0.2pp). The biggest drag on growth was net exports (exports less imports) (-0.6 percentage points), inventories (-0.2pp) and dwelling investment (-0.1pp).
• Flat income growth: Real gross national income was unchanged in the June quarter to be up 0.2 per cent on the year.
• States & territories: The best description of the performance of States and Territory economies is state final demand plus net exports. The ACT had the fastest annual growth rate in the June quarter (up 5.4 per cent), followed by Victoria (up 2.9 per cent), NSW (up 2.4 per cent), South Australia (up 0.7 per cent) and Tasmania (up 0.5 per cent). The Northern Territory contracted by 11.4 per cent followed by Western Australia (down 2.4 per cent) and Queensland (down 0.8 per cent).
• Industry sectors: Thirteen of the 19 industry sectors expanded in the June quarter. Rental, hiring and real estate services grew by 2.7 per cent, contributing 0.1 percentage points (pp) to growth in the quarter. Five other sectors contributed 0.1 percentage points to growth. The weakest sectors were Mining (down 3.0 per cent and removing 0.3pp from growth) and Agriculture, forestry and fishing (down 2.3 per cent).

What does it all mean?

• The headline growth figures certainly look a bit on the soft side. But the breakdown of the growth components provides a much more interesting picture. Government consumption provided the biggest contribution to growth while household consumption held up relatively well. The biggest drag was net exports which detracted 0.6 percentage points from growth. In addition the drawdown in inventories also crimped growth by 0.2 percentage points. Overall, not an “ideal” mix of growth drivers, but close enough for this point in the cycle. The good news is that productivity is still rising while wage costs are falling and price pressures are restrained.
• The economic growth figures are largely important as an historical record. But the data can’t tell us much about the here and now. And certainly the figures have limited use in telling us where the economy is going. But for the Reserve Bank the data serves as a base for its forecasts. It’s a case of ticking the figures off to ensure that there are no surprises.
• Overall the data confirms that growth over the past year has been below trend but “ok” for an economy that is going through a generational transition. Despite all the doom and gloom about the winding back of mining investment, fiscal contraction and horror stories about the collapse of the manufacturing sector it is pretty clear that the economy is in reasonable shape – certainly in better shape than most other so-called “advanced” economies.
• While media commentary is likely to focus on the fact that growth is a touch on the soft side the key point is that Australia has completed 24 consecutive years of growth. It is an achievement to be celebrated. And interestingly the drawdown in inventories in the quarter may be as a result of the lift in domestic demand, and it does mean that businesses will be re-stocking shelves in coming quarters – supporting the overall growth figures.
• Looking forward growth will continue to remain mixed over the next few months. The transition from mining to housing-led investment continues to be the dominant driver of activity. Although somewhat encouragingly the ongoing lift in consumer and business confidence is now translating through to a lift in risk appetite and investment plans.
• CommSec tips the economy to grow by 2.75-3.00 per cent over the coming year. CommSec believes that given the ongoing below trend growth outcomes, the Reserve Bank is unlikely to lift interest rates over the next year.

What do the figures show?

National Accounts:

• Economic Growth: The economy grew by 0.2 per cent in the June quarter after a 0.9 per cent increase in the March quarter.
• The economy has grown 2.0 per cent over the past year, below the decade-average growth rate of 2.8 per cent and below the 15-year average of 2.9 per cent. In 2014/15, the economy grew by 2.4 per cent.
• The non-farm economy grew by 0.2 per cent in the June quarter after a 0.9 per cent lift in the March quarter. Annual growth stands at 1.9 per cent.
• Farm GDP fell by 2.6 per cent in the June quarter after rising by 0.3 per cent in the March quarter. Farm GDP rose 4.1 per cent over the year.
• At current prices, GDP rose by 0.3 per cent in the quarter to be up by 1.6 per cent over the year. The annual growth rate is well below the decade average of 6.2 per cent. Over the year to June 2015, the Australian economy was valued at $1,612 billion.
• Growth drivers: The biggest contributions to growth came from government consumption (+0.4 percentage points), followed by household consumption expenditure (+0.3pp), and public investment (+0.2pp). The biggest drag on growth was net exports (exports less imports) (-0.6 percentage points), inventories (-0.2pp) and dwelling investment (-0.1pp).
• Inflation: In terms of domestic price pressures, the household consumption implicit price deflator rose 0.7 per cent in the June quarter after a 0.3 per cent lift in the March quarter. Annual growth stands at just 1.4 per cent. Real non-farm unit labour costs rose by 1.1 per cent in the June quarter after falling by 0.6 per cent in the March quarter. Real non-farm unit labour costs rose by just 0.9 per cent over the year.
• Productivity: Gross value added per hours worked in the market sector rose 0.4 per cent in the June quarter after 0.3 per cent growth in the March quarter. Annual growth stands at 0.8 per cent. Hours worked in the market sector were up 0.3 per cent in the quarter to be up 1.7 per cent for the year.
• States & Territories: The best description of the performance of States and Territory economies is state final demand plus net exports. The ACT had the fastest annual growth rate in the June quarter (up 5.4 per cent), followed by Victoria (up 2.9 per cent), NSW (up 2.4 per cent), South Australia (up 0.7 per cent) and Tasmania (up 0.5 per cent). The Northern Territory contracted by 11.4 per cent followed by Western Australia (down 2.4 per cent) and Queensland (down 0.8 per cent).
• Consumer spending lifts. Household spending rose by 0.5 per cent in the June quarter to be up 2.5 per cent for the year. Only five of the 17 sectors recorded weaker spending in the quarter. Spending on Health rose by 2.5 per cent followed by Communications (up 1.9 per cent). But spending fell in Cigarettes & tobacco and Alcoholic beverages (both down 2.2 per cent) and Electricity, gas and fuel (down by 2.0 per cent).
• Industry sectors: Thirteen of the 19 industry sectors expanded in the June quarter. Rental, hiring and real estate services grew by 2.7 per cent, contributing 0.1 percentage points (pp) to growth in the quarter. Five other sectors contributed 0.1 percentage points to growth. The weakest sectors were Mining (down 3.0 per cent and removing 0.3pp from growth) and Agriculture, forestry and fishing (down 2.3 per cent).
• Other points:
  – Profit share falls. In seasonally adjusted terms, the ratio of profits to total factor income fell from 26.3 to 25.4 per cent in the June quarter. The wages share rose from 53.0 per cent to 53.4 per cent.
  – Household savings ratio rose. The household saving ratio lifted from 8.3 per cent to 8.8 per cent in seasonally adjusted terms in the June quarter. In trend terms household saving held steady at 8.6 per cent in the quarter.
  – Imports ease as a share of spending. The imports to sales ratio fell from 0.394 in the March quarter to 0.392 in the June quarter.
  – The inventory to sales ratio rose from 0.627 in the March quarter to 0.643 in the June 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. But the data is taken into account by the Reserve Bank, serving as a base for forecasts. The Reserve Bank uses six-month annualised growth figures to ascertain how the economy is travelling. And in that context growth looks more robust annualising at around 2.2 per cent.
• Importantly business confidence and conditions remain healthy and should support a lift in activity over the latter part of 2015.
• At present there is no rush to lift or cut interest rates although the risks lie with another rate cut given the patchiness in the economy. CommSec believes interest rates will remain unchanged over the rest of 2015.