Record economic expansion continues

National accounts

• Record expansion: The economy grew by 1.1 per cent in the December quarter after contracting 0.5 per cent in the September quarter. Annual economic growth lifted from 1.9 per cent to 2.4 per cent. The economy has not experienced a recession for more than 25 years.
• Contribution to growth: The biggest contribution to growth came from household consumption (+0.5 percentage points) followed by public investment (+0.3pp) and net exports (+0.2pp). Dwelling investment and commercial building added 0.1pp each. The biggest drag on growth was inventories (down 0.2pp).
• Income: Real gross national income rose by 2.6 per cent in the December quarter to be up 6.2 per cent on the year. In nominal terms GDP lifted 3.0 per cent in the quarter and rose by 6.1 per cent over the year.
• Productivity: Gross value added per hours worked in the market sector grew by 0.7 per cent in the December quarter after falling 0.6 per cent in the September quarter. Annual growth was 2.4 per cent.
• Industry sectors: Fourteen of the 19 industry sectors expanded in the December quarter. The strongest sectors were Agriculture, forestry and fishing; Mining; and Professional, scientific and technical services, all adding 0.2 percentage points to economic growth. Six other sectors each added 0.1 percentage points. Manufacturing and Construction each reduced growth by 0.1pp.

What does it all mean?

• The Australian economy grew by 1.1 per cent in the December quarter. In fact there hasn’t been a faster pace of growth for over 5 years. However the pessimists will say the data is wrong, the economy isn’t that strong. And they would be partially right. After all the economy did go backwards by 0.5 per cent in the September quarter, so the latest result essentially cancels that out and adds back a modest amount of growth. Interestingly the lift in activity over the December quarter resulted in a drawdown in inventories which somewhat perversely detracted from the headline growth result.
• The important point is that everything that could have gone wrong in the September quarter did go wrong – bad weather, elections, and geopolitical events. The economy contracted, but that under-represented the true health of the economy. Growth was always going to bounce back and it did.
• The latest result highlights the shift in momentum that has taken place in the past few months. The Australian economy is getting its mojo back, now it is up to policymakers to foster an environment that ensures businesses feel comfortable to lift investment levels.
• Exports, tourist arrivals, home prices, and car sales are at record highs. Unemployment is near 3½-year lows. Economy-wide sales are healthy, while there is a huge pipeline of home building to come. 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. Importantly the lift in commodity prices – iron ore and coal – should support a further lift in activity across the mining sector.
• The Reserve Bank is always looking ahead and so must we. The outlook for the economy remains bright. The Reserve Bank expects the economy to grow near its ‘potential’ rate of 3 per cent by the end of 2017. That is our expectation also. We continue to believe that interest rates will remain on hold over the rest of 2017

What do the figures show?

National Accounts:

• Economic Growth: The economy lifted by 1.1 per cent in the December quarter after a fall of 0.5 per cent increase in the September quarter.
• The economy has grown by 2.4 per cent over the past year, up from 1.9 per cent growth in the year to September. Growth has averaged 2.7 per cent over the decade and averaged 3.0 per cent over the last 15 years.
• The non-farm economy rose by 0.9 per cent in the December quarter after falling by 0.8 per cent in the September quarter. Annual growth stands at 2.0 per cent.
• Farm GDP rose by 9.7 per cent in the December quarter after rising by 26.9 per cent in the September quarter. Farm GDP rose by 26.9 per cent over the year.
• At current prices, GDP rose by 3.0 per cent in the December quarter to be up 6.1 per cent on the year. The annual growth rate is still well above the decade average of 5.1 per cent. Over the year to December 2016, the Australian economy was valued at $1,692 billion.
• Growth drivers: The biggest contribution to growth came from household consumption (+0.5 percentage points) followed by public investment (+0.3pp) and net exports (+0.2pp). Dwelling investment and commercial building added 0.1pp each. The biggest drag on growth was inventories (down 0.2pp).
• Inflation: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.3 per cent in the December quarter after a 0.1 per cent increase in the September quarter. Annual growth stands at 0.9 per cent – the weakest growth in 17 years. Real non-farm unit labour costs fell by 3.1 per cent in the December quarter after rising 0.2 per cent in the December quarter. Real non-farm unit labour costs fell by a record 4.2 per cent over the year.
• Productivity: Gross value added per hours worked in the market sector grew by 0.7 per cent in the December quarter after falling 0.6 per cent in the September quarter. Annual growth was 2.4 per cent. GDP per hour worked rose by 0.4 per cent in the quarter to be up 1.8 per cent over the year. And hours worked in the market sector rose by 0.7 per cent in the quarter to be up 0.6 per cent on the year.
• States & Territories: The only data available is state final demand (more accurate data would include net exports but it is not available for all states and territories). In the December quarter growth was strongest in the Northern Territory (up 3.7 per cent) from Victoria (up 1.7 per cent), the ACT (up 1.6 per cent), Queensland, Tasmania and South Australia (all up 0.9 per cent), NSW (up 0.8 per cent) and Western Australia (up 0.4 per cent).
• Consumer spending lifts. Household spending rose by 0.9 per cent in the December quarter to be up 2.6 per cent for the year. Only three of the 17 sectors recorded weaker spending in the quarter. Spending rose most in Furnishings and household equipment (up 2.6 per cent) and Transport service costs (up 2.5 per cent). Spending fell most in Cigarettes and tobacco (down by 0.8 per cent); Hotels, cafes and restaurants (down by 0.2 per cent); and Operation of vehicles (also down by 0.2 per cent).
• Industry sectors: Fourteen of the 19 industry sectors expanded in the December quarter. The strongest sectors were Agriculture, forestry and fishing; Mining; and Professional, scientific and technical services, all adding 0.2 percentage points to economic growth. Six other sectors each added 0.1 percentage points. Manufacturing and Construction each reduced growth by 0.1pp.
• Other points:
  • Profit share rises. In seasonally adjusted terms, the ratio of profits to total factor income rose from 24.4 per cent to 26.5 per cent in the December quarter. The wages share fell from 54.3 per cent to 52.3 per cent.
  • Household savings ratio falls. The household saving ratio fell from 6.3 per cent in seasonally adjusted terms in the September quarter to 5.2 per cent. In trend terms household saving fell from 6.1 per cent to 5.6 per cent in the December quarter.
  • Imports rose as a share of spending. The imports to sales ratio rose from 0.377 in the September quarter to 0.378 in the December quarter.
  • The inventory to sales ratio fell from 0.626 per cent in the September quarter to 0.607 per cent.

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. Given the negative result in the September quarter data suggests growth remains well below par. No doubt policymakers would be more forward looking and from that perspective the outlook remains healthy. The Reserve Bank remains comfortably on the interest rates sidelines.
• 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. And while growth is currently largely focussed on the ‘housing’ regions of NSW, Victoria and ACT, improved economic outcomes are spreading.
• Importantly income measures posted solid growth over the December quarter. Real gross national income rose 6.2 per cent over the year with net national disposable income up by 6.8 per cent. So there is no shortage of income to drive spending and investment decisions.