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Economy growing at fastest pace in 15 monthsNational accounts
Record expansion: The economy grew by 0.6 per cent in the September quarter after rising by 0.9 per cent(revised) in the June quarter. Annual economic growth rose to 2.8 percent – the fastest pace since June 2016 – up from 1.9 per cent. The economy has moved into its 27th year of continued economic expansion – the last recession was January-June 1991. The household savings rate rose to 15 month highs of 3.2 per cent.
Contribution to growth: The biggest contribution to growth came from private sector investment. Private non-dwelling construction rose by 0.9 percentage points (pp). Inventories (+0.2pp), household consumption (+0.1pp) and private equipment (+0.1pp) all made contributions. However, household consumption grew at its weakest pace in 5 years. The biggest drag on growth was government consumption (-0.4pp) and dwelling investment (-0.1pp), while net exports were flat.
Income: Real gross national income rose by 0.2 per cent in the September quarter to be up 3.3 per cent on the year. In nominal terms GDP increased by 0.5 per cent in the quarter and rose by 5.2 per cent annually.
Productivity: Gross value added per hours worked in the market sector was flat in the September quarter after falling by 0.2 per cent in the June quarter. Annual growth was 1.0 per cent.
Industry sectors: Sixteen of the 19 industry sectors expanded in the September quarter. Other services (up 2.2 per cent) and Electricity, gas, water and waste services (up 1.9 per cent) were strong performers. Agriculture, forestry and fishing (down 4.1 per cent) and Rental, hiring and real estate services (down 1.6 per cent) were poor performers. Five sectors added 0.1 percentage points to growth over the quarter.
What does it all mean?
Aussie economic conditions have improved markedly after a weather impacted start to the year. The annual rate of economic growth accelerated to 2.8 per cent in the September quarter – the fastest increase since June 2016. This is a significant step-up from the lacklustre 1.7 per cent growth recorded in the March quarter – the slowest rate since September 2009. The September quarter release was also boosted by the low base effect generated from the disappointing quarterly contraction 12 months ago.
While the economy grew at a modestly slower quarterly rate in September than in June, the annual expansion of 2.8 per cent breached the Reserve Bank’s 2.5 per cent economic growth (GDP) forecast for December 2017 detailed in its Statement on Monetary Policy released in November. The Board broadly considers an annual growth rate of 2.75-3.00 per cent to be Australia’s current trend growth level where unemployment and inflation are broadly stable.
The Aussie economy is expected to expand at a solid pace over the next couple of years, supported by nonmining business investment. Businesses are in great shape with conditions and profitability the best levels in 20 years. Businesses are spending, investing and employing, driving down the jobless rate to 4½-year lows. 
Services sectors, such as tourism and education, together with agribusinesses are likely to drive continued Aussie economic expansion. The global economic expansion is supportive of Aussie exporters and external facing sectors. Chinese demand for Australia’s high quality goods and services remains elevated amid a growing middle class, rising incomes and changing diets.
Consumer confidence remains uninspiring due to lower wages growth, elevated household debt and spending on ‘grudge’ purchases like utility bills, council rates and insurance premiums. With household budgets under pressure, Aussies are being selective with their spending, preferring to take advantage of aggressive discounting by retailers and focusing on “experiences” such as going to restaurants, the cinema, sporting and music events. Spending is likely to remain firm, but highly dependent on continued jobs growth.
The household savings rate has risen for the first time in five quarters, as consumers adjust their spending habits. Incomes are growing because more hours are being worked and wages are steadily rising.
While home building is set to slow, infrastructure spending will likely take its place to boost the economy – especially more roads, tunnels and railways. A project pipeline of $35 billion through to 2019/20 is currently in place, supported by federal and state government spending and asset sales.
One uncertainty is wages, which remains a puzzle for the broader inflation story. The Reserve Bank is hopeful that the strengthening employment market – as it approaches full employment – will eventually lead to higher wages. Policymakers recently noted that skills shortages are emerging in some industries and it is hoped that this will force company employers into increasing wages. Modest wage growth is a global phenomenon – 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.
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 2.75-3.25 per cent over 2018. Our expectation is for growth of around 3.0 percent. We continue to believe that interest rates will remain on hold until late 2018. The next rate move is most likely up, but not for some time. Inflation remains contained for now.
What do the figures show?National Accounts:
Economic Growth: The Aussie economy rose by 0.6 per cent in the September quarter after lifting by a revised 0.9 per cent in the June quarter.
The economy has grown by 2.8 per cent over the past year. 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 September quarter having also increasing by 0.8 per cent in the June quarter. Annual growth stands at 2.5 per cent.
Farm GDP fell by 3.0 per cent in the September quarter after declining by 2.0 per cent in the June quarter. Farm GDP increased by 1.8 per cent over the year.
At current prices, GDP rose by 0.6 per cent in the September quarter after a flat outcome in the June quarter. Annual growth stands at 5.9 per cent, above the decade average of around 5.0 per cent. Over the year to September 2017, the Australian economy was valued at $1,782 billion.
Growth drivers: The biggest contribution to growth came from private sector investment. Private non dwelling construction rose by 0.9 percentage points (pp). Inventories (+0.2pp), household consumption (+0.1pp) and private equipment (+0.1pp) all made contributions. The biggest drag on growth was government consumption (- 0.4pp) and dwelling investment (-0.1pp), while net exports were flat.
Inflation: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.1 per cent in the September quarter after increasing by 0.4 per cent in the June quarter. Annual growth stands at 1.1 per cent. Real non-farm unit labour costs rose by 0.2 per cent in the September quarter after increasing by 1.4 per cent in the June quarter. Real non-farm unit labour costs fell by 2.9 per cent over the year.
Productivity: Gross value added per hours worked in the market sector were flat in the September quarter after falling by 0.2 per cent in the June quarter. Annual growth was 1.0 per cent. GDP per hour worked were also flat in the September quarter after declining by 0.4 per cent in the June quarter to be up 0.1 per cent over the year. And hours worked in the market sector rose by 0.4 per cent in the quarter to be up 2.2 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 September quarter, growth was strongest in NSW (up 1.0 per cent), Northern Territory (up 0.9 per cent), Western Australia (up 0.9 per cent), Victoria (up 0.4 per cent), Queensland (up 0.2 per cent) and South Australia (up 0.2 per cent). State final demand fell in the ACT (down 1.0 per cent) and Tasmania (down 0.8 per cent).
Consumer spending lifts. Household spending rose by 0.4 per cent in the September quarter to be up 2.2 per cent for the year. Only five of the 17 sectors recorded weaker spending in the quarter. Spending rose most for Insurance and other financial services (up 1.2 per cent) and Food (up 1.1 per cent), Spending fell most in Electricity, gas and other fuel (down 0.5 per cent) followed by Transport services and Recreation and culture (both down 0.2 per cent).
Industry sectors: Sixteen of the 19 industry sectors expanded in the September quarter. Other services (up 2.2 per cent) and Electricity, gas, water and waste services (up 1.9 per cent) were strong performers. Agriculture, forestry and fishing (down 4.1 per cent) and Rental, hiring and real estate services (down 1.6 per cent) were poor performers. Five sectors added 0.1 percentage points to growth over the quarter.
Other points:
Profit share rises. In seasonally adjusted terms, the ratio of profits to total factor income rose from 27.1 per cent to 27.2 per cent in the September quarter. The wages share rose from 52.6 per cent to 52.8 per cent.
Household savings ratio rises. The household saving ratio fell increased by 3.2 per cent in seasonally adjusted terms in the September quarter from 3.0 per cent in the June quarter. In trend terms household saving fell from 3.3 per cent to 3.2 per cent in the September quarter.
Imports rose as a share of spending. The imports to sales ratio rose fell from 0.386 in the June quarter to 0.382 in the September quarter.
The inventory to sales ratio fell from 0.616 per cent in the June quarter to 0.607 per cent in the 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 an 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. 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?
Aussie annual economic growth and the household savings rate have both risen to 15 month highs. The Reserve Bank would be happy with these developments. Annual growth is back near trend levels, supported by the continued expansion of the non-mining sectors of the economy. Businesses are hiring workers and spending. Jobs are being created in the services sector, the growth engine of the Australian economy. Infrastructure spending by governments is also supportive of growth.
The Reserve Bank has a neutral monetary policy stance presently and is awaiting confirmation that stronger hiring intentions and skilled worker shortages will translate into wages growth sufficient to lift inflation. Official interest rates are on hold until at least late 2018.
Originally published by Ryan Felsman, Senior Economist, CommSec