Record expansion moves into 27th year

National accounts

• Record expansion: The economy grew by 0.8 per cent in the June quarter after rising by 0.3 per cent in the March quarter. Annual economic growth held at 1.8 per cent. The economy has just completed its 26th consecutive year of growth – the last recession was January-June 1991.
• Contribution to growth: The biggest contribution to growth came from public investment (+0.6 percentage points) from household consumption (+0.4pp), net exports (+0.3pp), government consumption (+0.2pp) and private equipment (+0.1pp). The biggest drag on growth was from inventories (down 0.6pp) and private commercial building investment (down 0.4pp).
• ncome: Real gross national income fell by 0.5 per cent in the June quarter to be up 4.7 per cent on the year. In nominal terms GDP fell by 0.1 per cent in the quarter and rose by 6.3 per cent over the year.
• Productivity: Gross value added per hours worked in the market sector fell by 0.2 per cent in the June quarter after rising 0.4 per cent in the March quarter. Annual growth was 0.5 per cent.
• Industry sectors: Twelve of the 19 industry sectors expanded in the June quarter. Professional, scientific and technical services added 0.2 percentage points to growth. Five other sectors each added 0.1pp. Two sectors each reduced growth by 0.1pp.

What does it all mean?

• In the US, analysts express economic growth in annualised terms – the quarterly growth rate is multiplied by four. In these terms, Australia is growing at a 3.3 per cent annualised rate. Now this is clearly not the case, growth has moved in a zig-zag fashion over the past year. For the 2016/17 year, the economy grew by 1.9 per cent.
• But the economic growth figures look backwards, not forwards. Looking ahead, the economy is gathering momentum with businesses making money, investing and hiring new workers. The global economy is also in better shape. And while home building is set to slow, its place will be taken by infrastructure spending – especially more roads, tunnels and railways.
• One uncertainty is wages. The Reserve Bank is hopeful that the better growth in the job market will lead to higher wages. But modest wage growth is a global trend – a response to increased globalisation and low inflation. But consumers are getting used to the “new normal” of 2-3 per cent wage growth. And wages are still running ahead of inflation. As a result, consumers are spending at a “normal” 2.6 per cent annual rate.
• The Reserve Bank is always looking ahead and so must we. The economic outlook is encouraging. The Reserve Bank expects the economy to grow by around 3 per cent over 2018. That is our expectation also. We continue to believe that interest rates will remain on hold over the rest of 2017 and well into 2018. The next rate move is probably up, but not for some time.

What do the figures show?

National Accounts:

• Economic Growth: The economy rose by 0.8 per cent in the June quarter after lifting by 0.3 per cent in the March quarter.
• The economy has grown by 1.8 per cent over the past year. Over 2016/17 as a whole the economy grew by 1.9 per cent. Growth has averaged 2.6 per cent over the decade and averaged 2.9 per cent over the last 15 years.
• The non-farm economy rose by 0.8 per cent in the June quarter after rising 0.5 per cent in the March quarter. Annual growth stands at 1.4 per cent.
• Farm GDP rose by 0.5 per cent in the June quarter after falling by 4.6 per cent in the March quarter. Farm GDP rose by 25.6 per cent over the year.
• At current prices, GDP fell by 0.1 per cent in the June quarter after rising by 2.3 per cent in the March quarter. Annual growth stands at 6.3 per cent, well above the decade average of 5.0 per cent. Over the year to June 2017, the Australian economy was valued at $1,754 billion.
• Growth drivers: The biggest contribution to growth came from public investment (+0.6 percentage points) from household consumption (+0.4pp), net exports (+0.3pp), government consumption (+0.2pp) and private equipment (+0.1pp). The biggest drag on growth was from inventories (down 0.6pp) and private commercial building investment (down 0.4pp).
• Inflation: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.4 per cent in the June quarter after a similar increase in the March quarter. Annual growth stands at 1.4 per cent. Real non-farm unit labour costs rose by 1.4 per cent in the June quarter after falling 2.0 per cent in the March quarter and falling 3.6 per cent in the December quarter. Real non-farm unit labour costs fell by 3.7 per cent over the year.
• Productivity: Gross value added per hours worked in the market sector fell by 0.2 per cent in the June quarter after rising 0.4 per cent in the March quarter. Annual growth was 0.5 per cent. GDP per hour worked fell 0.3 per cent in the June quarter after rising 0.1 per cent in the March quarter to be up 0.5 per cent lower over the year. And hours worked in the market sector rose by 1.1 per cent in the quarter to be up 2.4 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 June quarter growth was strongest in South Australia (up 1.7 per cent) from Victoria (up 1.3 per cent), NSW and Tasmania (both up 1.2 per cent), and Queensland (up 1.1 per cent). SFD fell 1.1 per cent in the Northern Territory; fell 0.3 per cent in Western Australia; and fell 0.2 per cent in the ACT
• Consumer spending lifts. Household spending rose by 0.7 per cent in the June 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 Clothing and footwear (up 2.6 per cent) and Furnishings and household equipment (up 2.0 per cent). Spending fell most in Electricity, gas and other fuel (down 3.7 per cent) followed by Purchase of vehicles (down 1.1 per cent).
• Industry sectors: Twelve of the 19 industry sectors expanded in the June quarter. Professional, scientific and technical services added 0.2 percentage points to growth. Five other sectors each added 0.1pp each. Two sectors each reduced growth by 0.1pp.
• Other points:
  • Profit share falls. In seasonally adjusted terms, the ratio of profits to total factor income fell from 27.5 per cent to 26.8 per cent in the June quarter. The wages share rose from 51.4 per cent to 51.9 per cent.
  • Household savings ratio falls. The household saving ratio fell from 5.3 per cent in seasonally adjusted terms in the March quarter to 4.6 per cent in the June quarter. In trend terms household saving fell from 5.2 per cent to 4.8 per cent in the June quarter.
  • Imports rose as a share of spending. The imports to sales ratio rose from 0.392 in the March quarter to 0.394 in the June quarter.
  • The inventory to sales ratio fell from 0.606 per cent in the March quarter to 0.603 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?

• Official interest rates are on hold until 2018.
• Fewer homes will be built over the next year, but infrastructure spending gets into full swing. So construction and building material suppliers have the potential to do well with engineering companies and service providers and infrastructure operators.
• Productivity has slowed only because labour hiring has lifted. Annual longer-term productivity growth is healthy is around 1.8-1.9 per cent.