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Australia: After 28 years, still growing
National accounts

Expansion continues: Australia’s record economic expansion is well into its 29th year. The Australian economy grew by 0.5 per cent in the December quarter (consensus: +0.3 to +0.5 per cent) after an upwardly-revised 0.6 per cent increase in the September quarter. The economy grew 2.2 per cent over the year to December.

Contribution to growth: The biggest contributions to growth came from household consumption, ownership transfer costs and inventories (all +0.2 percentage points); followed by government consumption and net exports (both +0.1pp). Detracting from growth was dwelling and non-dwelling (commercial) investment (both -0.2pp).

Income: Real net national disposable income fell by 0.9 per cent in the December quarter after a similar rise in the September quarter but income was up 2.7 per cent on the year. In nominal terms GDP fell by 0.3 per cent in the quarter but rose by 4.1 per cent over the year (annual average +4.5 per cent).

Productivity: Gross value added per hours worked in the market sector rose by 0.2 per cent in the December quarter to be up by 0.2 per cent on the year. Hours worked in the market sector rose by 0.3 per cent in the December quarter and were up by 1.5 per cent on the year.

Industry sectors: Fifteen of the 19 industry sectors expanded in the December quarter. Six sectors each added 0.1 percentage point (pp) to economic growth. The biggest fall was by construction, down 2.3 per cent in the quarter, taking 0.2pp from GDP growth.

What does it all mean?

• Over the last 28 years the economy has stared down numerous challenges. Indeed, the economy has a wonderful knack of responding to challenges or crises. If consumers forgot how to spend, then exports or government spending have regularly stepped up to the plate. In the last three months of 2019 it was construction that was the drag on growth with consumer and government spending and foreign demand acting to keep the economy chugging along.

• The gloomsters will be disappointed – again. The record economic expansion continues, despite the impact from the horrific bushfires late in the year.

• But the risk of a coronavirus-driven ‘technical recession’ is very real. By that, we mean the economy risks going backwards in the March and June quarters. That outcome is by no means certain, but it is a risk. To prevent this, what is required is a boost to economy-wide spending, especially from April to June.

• Interestingly – and somewhat perversely – the panic buying of household staples in recent days could serve to lift overall consumption and economic growth in the current March quarter.

• Productivity remains a challenge for the economy with the various measures showing growth of – at most – 0.4 per cent in the year to December. Stronger productivity growth is the route to higher wage growth and a higher standard of living by all Australians.

• Further rate cuts can’t be ruled out in a world facing the major challenge of the COVID-19 coronavirus outbreak. But the Reserve Bank is well aware that it is nearing its limits and there are no guarantees that ‘unconventional’ monetary policy stimulus can do any good in lifting the economy.

What do the figures show?

National Accounts:

• Economic Growth: The Aussie economy grew by 0.5 per cent in the December quarter after lifting by an upwardly-revised 0.6 per cent in the September quarter.

• The economy grew by 2.2 per cent over the year to December after 1.8 per cent growth in the year to September. Growth has averaged 2.6 per cent over the decade and averaged 2.7 per cent over the last 15 years.

• The non-farm economy rose by 0.5 per cent in the December quarter after a 0.6 per cent lift in the September quarter. Annual growth stands at 2.3 per cent.

• Farm GDP rose by 0.4 per cent in the December quarter to be down 2.2 per cent over the year.

• At current prices, GDP fell by 0.3 per cent in the quarter but rose by 4.1 per cent over the year (annual average +4.5 per cent).

• As at December 2019 the Australian economy was valued at $1,994.9 billion.

• Growth drivers: The biggest contributions to growth came from household consumption, ownership transfer costs and inventories (all +0.2 percentage points); followed by government consumption and net exports (both +0.1pp). Detracting from growth was dwelling and non-dwelling (commercial) investment (both -0.2pp).

• Inflation & wages: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.3 per cent in the December quarter after increasing by 0.5 per cent in the September quarter. Annual growth eased from 1.9 per cent to 1.8 per cent. Real non-farm unit labour costs rose by 1.4 per cent in the December quarter to be up 0.7 per cent over the year.

• Productivity: Gross value added per hours worked in the market sector rose by 0.2 per cent in the December quarter to be up by 0.2 per cent on the year. Hours worked in the market sector rose by 0.3 per cent in the December quarter and were up by 1.5 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). State final demand in the December quarter: NSW (up 0.5 per cent); Victoria (down 0.1 per cent); Queensland (up 0.2 per cent); South Australia (down 0.2 per cent); Western Australia (down 0.2 per cent); Tasmania (down 1.0 per cent); Northern Territory (up 0.3 per cent); and ACT (up 0.8 per cent).

• Consumer spending: Household spending rose by 0.4 per cent in the December quarter to be up 1.2 per cent for the year (decade average 2.6 per cent). Four sectors each contributed 0.1 percentage point to the overall lift in spending: Clothing & footwear; Rent; Furnishings & household equipment; and Recreation & culture.

• Industry sectors: Fifteen of the 19 industry sectors expanded in the December quarter. Six sectors each added 0.1 percentage point (pp) to economic growth. The biggest fall was by construction, down 2.3 per cent in the quarter, taking 0.2pp from GDP growth.

• Other points:

Ø Profit share at decade high. In seasonally adjusted terms, the ratio of profits to total factor income eased from 29.3 per cent to 28.9 per cent in the December quarter. The wages share rose from 52.0 per cent to a 2-year high of 52.5 per cent.

Ø Household savings ratio. The household saving ratio fell from 4.8 per cent in the September quarter to 3.6 per cent in the December quarter in seasonally adjusted terms. In trend terms household saving rose from 3.8 per cent to 4.0 per cent.

Ø Imports rose as a share of spending. The imports to sales ratio rose from 0.395 to an 11-year high of 0.406 in the December quarter.

Ø The private non-farm inventories to total sales ratio rose a record low of 0.577 per cent in the September quarter to 0.589 per cent in the December 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?

• Aussies started to use some of the tax cuts in the final quarter of 2019. The household saving ratio eased and household spending rose – the latter providing a solid contribution to economic growth in the quarter. Price pressures remained modest, ensuring that higher prices didn’t stand in the way of higher spending.

• Economic growth of 2.2 per cent may still be below what we perceive to be ‘good’ growth. But when you consider the global environment, the continued expansion in the Australian economy was laudable in 2019.

• Challenges certainly remain, especially COVID-19. But if we learnt anything from the past year, the Australian economy is certainly resilient – Brexit, US-China trade, elections, drought and low wage growth all buffeted the economy over the year. But the Australian economy continued to grow – notching up almost nine consecutive years (35 quarters) of uninterrupted growth.

• The Reserve Bank has left open the door to a final rate cut. But the Federal Government is putting the finishing touches to a stimulus package.

Published by Craig James, Chief Economist, CommSec