The great Australian economic expansion: 27 years old and counting

 

Chief Economist, Matthew Peter

This week, Australians received a snapshot of how the Australian economy is performing with the release, by the Australian Bureau of Statistics (ABS), of the June quarter national accounts. The focal point of the national accounts data is GDP, which measures output of final goods and services (i.e., the value of those goods and services that go to end users) produced in Australia, and that is our broadest measure of economic activity across the nation.

The data show that the Australian economy is travelling very nicely thank you, at an above-trend annual clip of 3.4%, about ½ a percentage point stronger than our estimate of trend growth, and stronger than most commentators (including ourselves) had been expecting. This follows upwardly-revised above-trend growth in the March quarter, and trend growth over the second half of 2017 (having initially been reported as below trend).

The ABS measures GDP from three different viewpoints: from the expenditure side, by adding up expenditure on goods and services of end users; from the income side, by adding up payments to workers in compensation for the supply of labour and to businesses, via profits, for their supply of capital and land; and (iii) from the production side, by adding up value added by industries. As each of these measures of GDP are calculated independently of one another, they may not give the same value (due to errors and omissions), even though they purport to measure the same thing. The ABS solve the problem of potentially different estimates of GDP arising from the three methodologies by averaging the measures. This quarter’s growth was strong across all measures, with the expenditure side measure up by 0.7% on a quarterly basis, the income side up by 0.9% and the production side measure a little stronger at 1.0%. What do these three measures tell us about the nature of growth in the Australian economy?

On the expenditure side, growth was broadly based across households, businesses, governments and foreigners (purchasing Australian exports). Consumer spending was solid, despite headwinds from falling house prices, elevated debt levels and tepid wage growth, growing at a trend-like quarterly rate (q/q) of 0.7% (annual rate (y/y) of 3.0%). Dwelling investment continued to contribute positively to growth, rising by a solid 1.7% q/q and 3.8% y/y, on the last legs of the housing construction boom. Government consumption expenditure, driven by the NDIS rollout, more than offset a temporary pull back in public infrastructure spending. Final public spending grew at 0.6% over the quarter, maintaining a very strong annual growth of 4.3%. Business investment was stable as the fall in capital expenditure by the mining sector ends. Growth in business investment was approximately flat over the quarter, while maintaining above-trend growth over the year of 4.1%. Finally, from the expenditure side, net exports contributed a small 0.1 percentage point to GDP growth over the quarter on the pick-up in LNG exports and a slowing in import growth as the fall in the AUD drove import prices higher.

On the income side strong employment has boosted household incomes, but wage growth per hour remains sluggish. Weak wage growth has meant that real household disposable income remains soft growing just 0.2% q/q, for a below-trend annual rate of 1.6%. Given robust spending, the household savings rate continues to fall, from 1.6% in the March quarter to 1.0% in the June quarter. Solid profit growth continued over the June quarter, with private non-financial corporate profits growing at 0.8% q/q for a whopping 9.7% y/y.

On the production side, agriculture continues to feel the wrath of the drought (-8.2% y/y), mining remains solid due to exports (5% y/y), construction is still strong (5.3% y/y), real estate is under pressure (0.8% y/y), health care is leading the way boosted by NDIS (7.2% y/y), professional services are picking up with the non-mining recovery (4.1% y/y) and retail & wholesale trade remain sluggish (0.9% y/y and 2.3% y/y, respectively).

Across the states, Victoria and ACT are leading the way, with strongly above-trend final demand growth of 5.2% y/y and 5.8% y/y, respectively. WA and the Northern Territory are still struggling, with the WA economy barely expanding (0.8% y/y) and the Northern Territory going backwards (-8.2% y/y), while SA, Tasmania, QLD and NSW grew at around the national average over past year.

The Australian economy continues to defy the pessimists that have been expecting that slow wage growth, high household debt levels, falling house prices and rising mortgage rates would conspire to drive the economy into an extended slowdown. While these headwinds to growth are present, other factors, such as low interest rates, a competitive exchange rate and low growth in unit labour costs are supporting the economy; particularly those sectors faced with international competition. The June quarter national accounts data show that the Australian economy remains robust and confirms our view that the Reserve Bank of Australia will be able to begin normalising of monetary policy as early as the June quarter of 2019.

 

Table 1: Financial market movements, 30 August – 6 September 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,878.1

-0.8%

US

2.87%

1.8 bps

US Dollar Index (DXY)

95.02

0.3%

Nikkei 225

22,487.9

-1.7%

Japan

0.11%

0.0 bps

USD-JPY

110.75

-0.2%

FTSE 100

7,319.0

-2.6%

UK

1.42%

-3.9 bps

GBP-USD

1.293

-0.6%

DAX

11,955.3

-4.3%

Germany

0.36%

0.9 bps

EUR-USD

1.162

-0.4%

S&P/ASX 200

6,160.4

-3.0%

Australia

2.57%

-0.4 bps

AUD-USD

0.720

-0.9%

Source: Bloomberg

 

For economic update by region, click here. 

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