National accounts
- Faster growth: The Australian economy grew by 0.6 per cent in the December quarter after an upwardly-revised 1.1 per cent increase in the September quarter (previously up 0.9 per cent). Forecasts had centred on 0.4 per cent growth in the economy in the quarter. The economy still hasn’t experienced a recession for over 24 years.
- The economy has grown 3.0 per cent over the past year, above the decade-average growth rate of 2.7 per cent and above the 15-year average of 2.9 per cent. Annualised growth over the past six months has been 3.4 per cent.
- Contribution to growth: The biggest contributions to growth came from household consumption expenditure (+0.4 percentage points), public investment and inventories (both up +0.2pp), government consumption, machinery & equipment investment and dwelling investment (all +0.1pp). The biggest drag on growth was from non-residential building (-0.5 percentage points).
- Flat income growth: Real gross national income rose by 0.1 per cent in the December quarter to be down 0.2 per cent on the year.
- Industry sectors: Thirteen of the 19 industry sectors expanded in the December quarter. Eight of the sectors each contributed 0.1 percentage points (pp) to growth in the quarter. Only two sectors cut 0.1 percentage points from growth. The strongest sectors were Rental, hiring and real estate services (2.8 per cent growth in the quarter) and Information media and telecommunications (up 2.7 per cent).
What does it all mean?
- The latest result certainly has provided a major confidence boost for Aussie families and businesses. Despite some perceptions to the contrary, the Australian economy is doing well. Not only was the September quarter result revised up to show growth of 1.1 per cent in the quarter but the annual growth rate is now showing the fastest expansion in almost two years.
- Interestingly if the Reserve Bank’s preferred measure of economic growth – six-month annualised growth rate – is taken into account it shows an even stronger 3.4 per cent annualised growth – well above the longer-term average. Certainly this isn’t an environment in which the Reserve Bank would be looking to cut rates, and perhaps, it results in policymakers removing the easing bias in coming months.
- In recent times there has been some discussion around the disconnect between the improvement in the job market and the real economy. And looking back it seems like the labour market was leading the GDP figures. Finally it seems the economy is singing the same tune. Even more encouraging, the result was broad-based with household consumption, public investment and government consumption all contributing to the growth story.
- It’s important to keep in mind that Australia is experiencing a generational transition from mining to other growth sectors. The terms of trade ratio is holding at a 10-year low and in that context we are certainly doing better than expected. Australia now ranks alongside Spain at the top of the leader-board when it comes to growth across advanced economies.
- It is important to keep in mind that the economy is still in the midst of the longest expansion ever recorded and the economic landscape looks in far better shape than even a year ago. Inflation is under control; interest rates are at historic lows; household spending is lifting; and home construction and exports are solid. There are plenty of reasons for Australians to be celebrating our good economic circumstances. A further lift in confidence and the translation through to consumer spending will be keys in driving growth over the coming year.
- Looking forward, the key will be the pipeline of business investment. Better activity levels may result in businesses committing to future investment projects. But at present, Corporate Australia continues to hold back from significant investment and as such the growth outcomes over the next year will be patchy.
- If there was any major disappointment in the latest result it would have to be that nominal GDP remains well below trend, growing by just 0.4 per cent over the quarter and annualising at 2.4 per cent. Clearly there are still a number of challenges across the economy and it is clear that weak nominal growth outcomes will remain a drag on business profitability and even the Federal Budget. CommSec believes that while there is uncertainty about whether policymakers will continue to maintain an easing bias when it comes to monetary policy, rates are likely to remain on hold over the rest of 2016.
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 1.1 per cent increase in the September quarter (previously up 0.9 per cent). Forecasts had centred on 0.4 per cent growth in the economy in the quarter.
- The economy has grown 3.0 per cent over the past year, above the decade-average growth rate of 2.8 per cent and above the 15-year average of 2.9 per cent. Annualised growth over the past six months has been 3.4 per cent.
- The non-farm economy grew by 0.6 per cent in the December quarter after a rising by 1.2 per cent in the September quarter. Annual growth stands at 3.1 per cent.
- Farm GDP rose by 1.6 per cent in the December quarter after contracting by 3.4 per cent in the September quarter. Farm GDP fell 1.6 per cent over the year.
- At current prices, GDP rose by 0.4 per cent in the December quarter to be up 2.4 per cent on the year. The annual growth rate is well below the decade average of 6.2 per cent. Over the year to December 2015, the Australian economy was valued at $1,629 billion.
- Growth drivers: The biggest contributions to growth came from household consumption expenditure (+0.4 percentage points), public investment and inventories (both up +0.2pp), government consumption, machinery & equipment investment and dwelling investment (all +0.1pp). The biggest drag on growth was from non-residential building (-0.5pp).
- Inflation: In terms of domestic price pressures, the household consumption implicit price deflator rose 0.4 per cent in the December quarter after a 0.2 per cent lift in the September quarter. Annual growth stands at just 1.7 per cent. Real non-farm unit labour costs fell by 0.3 per cent in the December quarter after rising by 0.5 per cent in the September quarter. Real non-farm unit labour costs rose by 0.9 per cent over the year.
- Productivity: Gross value added per hours worked in the market sector fell by 0.9 per cent in the December quarter after 0.9 per cent growth in the September quarter. Annual growth stands at 0.9 per cent. Hours worked in the market sector were up 1.3 per cent in the quarter to be up 1.9 per cent for the year
- States & Territories: The only data available is state final demand (more accurate data would include net exports). Victoria had the fastest annual growth rate in the December quarter (up 4.6 per cent), followed by NSW (up 3.4 per cent), ACT (up 3.1 per cent), Tasmania (up 3.0 per cent), South Australia (up 1.8 per cent). The Northern Territory contracted by 17.6 per cent followed by Western Australia (down 4.7 per cent) and Queensland (down 1.7 per cent).
- Consumer spending lifts. Household spending rose by 0.8 per cent in the December quarter to be up 2.9 per cent for the year. Only two of the 17 sectors recorded weaker spending in the quarter. Spending fell in Cigarettes & tobacco (down 4.8 per cent) and Purchase of vehicles (down 3.2 per cent). Spending rose most in Recreation & culture (up by 2.6 per cent) and Electricity, gas and other fuel (up 2.0 per cent).
- Industry sectors: Thirteen of the 19 industry sectors expanded in the December quarter. Eight of the sectors each contributed 0.1 percentage points (pp) to growth in the quarter. Only two sectors cut 0.1 percentage points from growth. The strongest sectors were Rental, hiring and real estate services (2.8 per cent growth in the quarter) and Information media and telecommunications (up 2.7 per cent).
Other points:
- Profit share lifts. In seasonally adjusted terms, the ratio of profits to total factor income rose from 25.1 to 25.2 per cent in the December quarter. The wages share fell from 54.0 per cent to 53.9 per cent.
- Household savings ratio fell. The household saving ratio fell from 8.7 per cent to 7.6 per cent in seasonally adjusted terms in the December quarter. In trend terms household saving fell from 8.5 per cent to 8.0 per cent in the December quarter.
- Imports fall as a share of spending. The imports to sales ratio eased from 0.399 in the September quarter to 0.397 in the December quarter.
- The inventory to sales ratio fell from 0.629 in the September quarter to 0.627 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. 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 annualises at around 3.4 per cent.
- Disappointingly, productivity recorded a sizeable fall in the December quarter with annualised growth holding at just 0.9 per cent. However this may be due to the sizeable lift in employment over 2015. Over 300,000 new jobs were created in 2015 – marking the best calendar year result in 8 years. It will take time for these new employees to be embedded in their new jobs and become more efficient.
- The strength in home prices and the low interest rate environment has ensured household balance sheets look healthy. And encouragingly household consumption has continued to lift. The household savings ratio fell in the quarter – suggesting households are feeling more comfortable about spending given the lift in job security.
- At present there is no rush to move rates in any direction. And while the Reserve Bank policymakers may remove the implicit “easing bias” in coming months, CommSec believes interest rates will remain unchanged over 2016.
