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Savanth Sebastian, Economist, CommSec

National accounts

– Firmer growth: The Australian economy grew by 0.9 per cent in the March quarter after a 0.5 per cent increase in the December quarter. Forecasts had centred on 0.7 per cent growth in the economy. The economy hasn’t experienced a recession for over 23 years.

– Contribution to growth: The biggest contributions to growth came from net exports (exports less imports) (+0.5 percentage points), followed by household consumption expenditure and inventories (both +0.3pp) and government consumption (+0.1pp). The biggest drag on growth was commercial construction (-0.4 percentage points), business equipment spending and public investment (both -0.1pp).

– States & territories: The best description of the performance of States and Territory economies is state final demand plus net exports. Victoria and Northern Territory had the fastest annual growth rates in the March quarter (up 3.3 per cent), followed by ACT (up 2.4 per cent), Tasmania (up 1.6 per cent), Western Australia (up 1.3 per cent), NSW (up 1.0 per cent), South Australia (up 0.5 per cent) and Queensland (down 0.1 per cent).

– Industry sectors: Sixteen of the 19 industry sectors expanded in the March quarter. Mining grew by 3.5 per cent, contributing 0.3 percentage points (pp) to growth in the quarter. The weakest sectors were Construction (down 0.8 per cent and removing 0.1pp from growth) and Administrative and support services (down 1.2 per cent).

– Household spending: Only three of the 17 sectors recorded weaker spending in the quarter. Spending on new vehicles rose by 5.4 per cent followed by Communications (up 2.4 per cent). But spending fell in Cigarettes & tobacco (down 3.8 per cent) and Recreation and culture (down by 0.7 per cent).

– Over the past year Australian’s spent a record $24 billion on gambling.

What does it all mean?

– The latest data serves as a wake-up call to households and the business sector. Despite some perceptions to the contrary, the Australian economy is doing ok. The economy recorded above-trend growth in the March quarter. In fact it was the fastest pace of growth in a year. And even more encouraging, the result was broad-based with household consumption, exports and housing all contributing to the growth story.

– There is no question that the recovery across the national economy is patchy, but given the array of stimulatory factors, the latest result highlights that the economic landscape looks primed for growth. Inflation is under control; interest rates are at historic lows; household spending is lifting; and home construction and exports are leading the way forward. 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 and business investment will be keys in driving growth over the coming year.

 

– If there was any disappointment in the latest result it was that, despite a lift in hours worked, productivity was flat in the quarter and going backwards in annual terms. It is a similar story to the monthly labour market figures – businesses are working existing staff a lot harder, hours worked are rising at the fastest pace in about four-years but this hasn’t translated through to a lift in output.

– Interestingly across the sectors, mining was the biggest contributor to growth, highlighting the fact that we are in the production boom phase after the investment boom in previous years.

– The hope is that the slide in the Australian dollar will lift manufacturing in coming years. As the CEO of BlueScope Paul O’Malley said a few months back, “manufacturing is in its embryonic stage” and the longer the currency remains at these lower levels the more support it will provide to domestic manufacturers. Also the lift in housing activity is providing a much needed boost to domestic fabrication.

– 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. Spending on new vehicles was the biggest contributor to consumption growth in the March quarter.

– It is not to say that there aren’t challenges across the economy. The population is ageing and this provides challenges for future revenues and spending. Over the next few years it will be important that non-partisan discussions are conducted about tax structures and entitlements.

– The Reserve Bank is likely to be pleasantly surprised about the latest economic growth results, although there is still a long way to go to see annual growth back at trend levels – 3.00-3.25 per cent. CommSec believes that policymakers will continue to maintain a neutral monetary policy stance, although the risks still lie with further rate cuts.

What do the figures show?

National Accounts:

– Economic Growth: The economy grew by 0.9 per cent in the March quarter – the fastest growth in a year and follows the 0.5 per cent growth in the December quarter.

– The economy has grown 2.3 per cent over the past year, below the decade-average growth rate of 2.8 per cent and below the 15-year average of 3.0 per cent.

– The non-farm economy grew by 0.9 per cent in the March quarter after a 0.5 per cent lift in the December quarter. Annual growth stands at 2.4 per cent.

– Farm GDP rose by 1.8 per cent in the March quarter after rising by 1.3 per cent in the December quarter. Farm GDP fell 0.9 per cent over the year.

– At current prices, GDP rose by 0.4 per cent in the quarter to be up by 1.2 per cent over the year. The annual growth rate is well below the decade average of 6.2 per cent. Over the year to March 2015, the Australian economy was valued at $1,604 billion.

– Growth drivers: The biggest contributions to growth came from net exports (exports less imports) (+0.5 percentage points), followed by household consumption expenditure and inventories (both +0.3pp) and government consumption (+0.1pp). The biggest drag on growth was commercial construction (-0.4 percentage points), business equipment spending and public investment (both -0.1pp).

– Inflation: In terms of domestic price pressures, the household consumption implicit price deflator rose 0.2 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. Real non-farm unit labour costs fell by 0.6 per cent in the March quarter after falling by 0.4 per cent in the December quarter. Real non-farm unit labour costs rose by just 0.8 per cent over the year.

– Productivity: Gross value added per hours worked in the market sector was flat in the March quarter after a flat result in the December quarter. Annual growth stands at -0.8 per cent. But hours worked in the market sector was up 1.3 per cent in the quarter to be up 2.7 per cent for the year.

– States & Territories: The best description of the performance of States and Territory economies is state final demand plus net exports. Victoria and Northern Territory had the fastest annual growth rates in the March quarter (both up 3.3 per cent), followed by ACT (up 2.4 per cent), Tasmania (up 1.6 per cent), Western Australia (up 1.3 per cent), NSW (up 1.0 per cent), South Australia (up 0.5 per cent) and Queensland (down 0.1 per cent).

– Consumer spending lifts. Household spending rose by 0.5 per cent in the March quarter to be up 2.6 per cent for the year. Only three of the 17 sectors recorded weaker spending in the quarter. Spending on new vehicles rose by 5.4 per cent followed by Communications (up 2.4 per cent). But spending fell in Cigarettes & tobacco (down 3.8 per cent) and Recreation and culture (down by 0.7 per cent).

– Industry sectors: Sixteen of the 19 industry sectors expanded in the March quarter. Mining grew by 3.5 per cent, contributing 0.3 percentage points (pp) to growth in the quarter. The weakest sectors were Construction (down 0.8 per cent and removing 0.1pp from growth) and Administrative and support services (down 1.2 per cent).

– Other points:

– Profit share steady. In seasonally adjusted terms, the ratio of profits to total factor income held steady at 26.4 per cent in the March quarter. The wages share eased from 53.2 per cent to 52.9 per cent.

– Household savings ratio eased. The household saving ratio eased from 8.8 per cent to 8.3 per cent in seasonally adjusted terms in the March quarter. In trend terms household saving eased from 8.8 per cent to 8.5 per cent in the quarter.

– Imports rise as a share of spending. The imports to sales ratio rose from 0.385 in the December quarter to 0.399 in the March quarter.

– The inventory to sales ratio eased towards record lows, dropping from 0.631 in the December quarter to 0.627 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 state final demand figures don’t provide a good estimate of regional economic conditions. Exports are healthy in Western Australia and Northern Territory, but aren’t being picked up in growth estimates. If the ABS provided quarterly state GDP figures, it would provide much more clarity on how well states are performing.

– 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 had tipped 2.0 per cent economic growth by the June quarter, but that estimate could prove mildly conservative. Federal Treasury expects the economy to hold at 2.5 per cent growth in 2014/15 – which looks more likely. If the post-budget pickup in confidence does translate to stronger spending then the budget will improve and the Reserve Bank will have been done cutting interest rates.

– At present there is no rush to lift or cut interest rates although the risks lie with another rate cut given the patchiness in the economy.