Fastest annual economic growth in 3½ years

National accounts

• Faster growth: The Australian economy grew by 1.1 per cent in the March quarter after an upwardly-revised 0.7 per cent increase in the December quarter (previously up 0.6 per cent). Forecasts had centred on 0.8 per cent growth in the economy in the quarter. The economy still hasn’t experienced a recession for almost 25 years.
• The economy has grown 3.1 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 3.6 per cent.
• Contribution to growth: The biggest contributions to growth came from net exports (exports less imports) (+1.1 percentage points), household spending (+0.4pp), government consumption (+0.2pp) and dwelling investment (+0.1pp). The biggest drag on growth was from non-residential building (-0.5 percentage points) and machinery & equipment investment (-0.1pp).
• Income: Real gross national income rose by 0.5 per cent in the March quarter to be up 0.6 per cent on the year. In nominal terms GDP lifted 0.5 per cent in the quarter and rose by 2.1 per cent over the year.
• Productivity: GDP per hours worked in the market sector rose by 1.0 per cent in the March quarter and by 1.8 per cent over the year.
• Industry sectors: Thirteen of the 19 industry sectors expanded in the March quarter. The strongest sector was Mining, up 6.2 per cent and adding 0.5 percentage points to growth. The Financial & Insurance Services sector rose by 1.8 per cent (+0.2pp).

What does it all mean?

•  The gloomsters will say the data is wrong, the economy isn’t that strong. Or they will say that the growth is unsustainable or unbalanced or even both. But it is hard to argue with a mountain of evidence. Exports, tourist arrivals, home prices, building approvals and car sales are at record highs. Unemployment is at 2½-year lows. Economy-wide sales are at 6-year highs. And not only are they at record highs, but home prices continue to lift, boosting wealth. And those figures are just the ‘top level’ results – there would be a raft of other highlights if you dig beneath the surface.
• The economy is not only growing at the fastest rate in 3½ years, it is growing faster than the “normal” rate – the 10-year or 15-year average. And what is happening is what is supposed to be happening – mining construction gave us extra production capacity, now that extra capacity is being put to work.
• Does it get any better? An economy that is growing at a fast clip, above the “normal” rate, underpinned by higher productivity growth but with inflation well under control.
• Other advanced economies can only wish for economic data as strong as that being published in Australia. The Australian economy hasn’t experienced a recession for 25 years. And the 26th year of uninterrupted growth begins in a month’s time. Importantly, Australia is transitioning from a once-in-a-century mining construction boom, and – so far – the transition is proceeding seamlessly.
• The $64 question is what does the Reserve Bank do now? Arguably with inflation low and likely to remain low, the Reserve Bank could cut rates, run the economy at a faster rate, and generate more jobs. But the risk is that lower rates will just add more fuel to the super-strong housing market. The last thing the Reserve Bank wants is to create an unsustainable boom in housing that could lead to a housing bust and broader economic downturn. We have worked too hard to see it all wasted with an economic downturn. If rates are cut again, it would need to be accompanied by the ‘third wheel’ of more active prudential policy to ensure a housing boom/bust situation is avoided.

What do the figures show?

National Accounts:

• Economic Growth: The Australian economy grew by 1.1 per cent in the March quarter after an upwardly-revised 0.7 per cent increase in the December quarter (previously up 0.6 per cent). Forecasts had centred on 0.8 per cent growth in the economy in the quarter. The economy still hasn’t experienced a recession for almost 25 years.
• The economy has grown 3.1 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 3.6 per cent.
• The non-farm economy grew by 1.1 per cent in the March quarter after a rising by 0.7 per cent in the December quarter. Annual growth stands at 3.2 per cent.
• Farm GDP rose by 2.9 per cent in the March quarter after expanding by 2.3 per cent in the December quarter. Farm GDP was relatively unchanged over the year.
• At current prices, GDP rose by 0.5 per cent in the March quarter to be up 2.1 per cent on the year. The annual growth rate is well below the decade average of 6.2 per cent. Over the year to March 2016, the Australian economy was valued at $1,637 billion.
• Growth drivers: The biggest contributions to growth came from net exports (exports less imports) (+1.1 percentage points), household spending (+0.4pp), government consumption (+0.2pp) and dwelling investment (+0.1pp). The biggest drag on growth was from non-residential building (-0.5 percentage points) and machinery & equipment investment (-0.1pp).
• Inflation: In terms of domestic price pressures, the household consumption implicit price deflator fell by 0.1 per cent in the March quarter after a 0.4 per cent lift in the December quarter. Annual growth stands at just 1.2 per cent – the lowest rate in 12 years. Real non-farm unit labour costs rose by 0.1 per cent in the March quarter after falling by 0.1 per cent in the December quarter. Real non-farm unit labour costs rose by 1.8 per cent over the year but were unchanged over the past six months.
• Productivity: GDP per hours worked in the market sector rose by 1.0 per cent in the March quarter and by 1.8 per cent over the year. Hours worked in the market sector were up 0.1 per cent in the quarter to be up 1.0 per cent for the year.
• States & Territories: The only data available is state final demand (more accurate data would include net exports). NSW had the fastest annual growth rate in the March quarter (up 3.9 per cent), followed by Victoria (up 3.2 per cent), ACT (up 2.9 per cent), Tasmania (up 2.1 per cent), South Australia (up 0.5 per cent). The Northern Territory contracted by 16.8 per cent, followed by Western Australia (down 4.2 per cent) and Queensland (down 1.8 per cent).
• Consumer spending lifts. Household spending rose by 0.7 per cent in the March quarter to be up 3.0 per cent for the year. Only two of the 17 sectors recorded weaker spending in the quarter. Spending fell in Cigarettes & tobacco (down 2.8 per cent) and Purchase of vehicles (down 0.4 per cent). Spending rose most in Transport services (up by 2.5 per cent) and Electricity, gas and other fuel (up 1.8 per cent).
• Industry sectors: Thirteen of the 19 industry sectors expanded in the March quarter. The strongest sector was Mining, up 6.2 per cent and adding 0.5 percentage points to growth. The Financial & Insurance Services sector rose by 1.8 per cent (+0.2pp).
• Other points:
  • Profit share eases. In seasonally adjusted terms, the ratio of profits to total factor income fell from 25.1 to 24.6 per cent in the March quarter. The wages share rose from 54.1 per cent to 54.4 per cent.
  • Household savings ratio rose. The household saving ratio rose from 7.5 per cent to 8.1 per cent in seasonally adjusted terms in the March quarter. In trend terms household saving fell from 8.0 per cent to 7.8 per cent in the March quarter.
  • Imports fall as a share of spending. The imports to sales ratio eased from 0.393 in the December quarter to 0.376 in the March quarter.
  • The inventory to sales ratio rose from 0.630 in the December quarter to 0.631 in the March 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 3.6 per cent.
• If you have faster economic growth, you want that underpinned by productivity. And it is. You also want inflation restrained together with labour costs – a further two ticks in these columns. You also want a broad range of sectors and states to be driving the economy. But growth is currently largely focussed on the ‘housing’ regions of NSW, Victoria and ACT. And mining did the heavy lifting work in the March quarter. It won’t be able to sustain that, so the focus will need to shift to ‘housing-dependent’ sectors over the year.
• The Aussie consumer is in good shape, and can keep spending. Home buyers are well in ahead with their loan repayments, so there is fat there to be drawn on. At the same time, household spending is solid while the savings rate also rose in the latest quarter.
• If the Reserve Bank was to cut rates in an attempt to lift inflation to a more desirable 2 per cent annual rate, it would need to be accompanied by more active prudential policy.
• Prudential policy is potentially the new ‘third wheel’ of policy. A combination of lower interest rates and tighter lending standards has the best chance of driving the economy forward, preventing low inflation becoming entrenched and ensuring an unsustainable housing boom doesn’t emerge.