Economy lifts again; posts record growth over the year

National Accounts

What happened? The Australian economy (as measured by gross domestic product or GDP) grew by 0.7 per cent in the June quarter after rising by 1.9 per cent in the March quarter. Over the year, the economy grew by a record 9.6 per cent (records back to 1959) – admittedly off a pandemic-induced low base.

Implications: Economic growth slowed ahead of lockdowns in many Australian regions over July and August. Federal, state and territory governments and the central bank will need to maintain significant economic support measures until well into 2022.

The national accounts is the broadest measure of Australia’s economic performance.

What does it mean?

• The National Accounts publication is the most comprehensive measure of Australia’s economic performance. But it is somewhat dated – with more up-to-date indicators (covering August) also released today. And in the Covid-19 world, that is important. So while it is encouraging that the economy grew again in the June quarter, a significant contraction of near 4 per cent is expected in the current September quarter. It is hoped that an easing or end to lockdowns will occur later this month in the ACT, NSW and Victoria, allowing the economy to rebound in the December quarter.

• Some of the most meaningful statistics at present can’t be found in economics, rather they are the vaccination rates across states and territories. Vaccination is the road out of the crisis, allowing economies to re-open.

• In the June quarter the economy was driven by household spending (added 0.6 percentage points to growth); public investment (+0.4pp); government consumption (+0.3pp); private investment (+0.3pp). Incomes – wages, profits and taxes – grew by 3.2 per cent in the quarter to be up a massive 16.4 per cent on the year.

• One of the most encouraging aspects of the National Accounts was the lift in government investment spending – highlighting the substantial increases in infrastructure projects that will support the economy over the next few years. The massive lift in infrastructure spending will benefit construction, building materials, engineering and mining over 2022. Also, the big fall in exports (down 3.2 per cent in the June quarter) – due largely to supply constraints – masked a stronger underlying domestic economy before the Delta variant outbreaks caused shutdowns.

• Household spending should also be supported over 2022 by the wealth effects of 20 per cent plus annual growth rates for sharemarket and residential property returns and a falling jobless rate. And the household savings rate remains elevated at 9.7 per cent, underpinned by continued government Covid-19 support payments, which could be used to “revenge spend” once lockdowns ease.

• Commonwealth Bank (CBA) Group economists expect the Australian economy to grow 3.1 per cent in the current 2021 calendar year before growing 3.8 per cent in 2022.

• The economy will remain supported by fiscal and monetary policy measures in coming months. We also expect that other economies like the US will also apply restraint in paring back (tapering) stimulus. But the path ahead for the sharemarket is likely to remain choppy as policymakers monitor Delta case numbers, vaccination rates, job markets and inflation measures.

What do you need to know?

• Economic Growth: The Australian economy (as measured by gross domestic product or GDP) grew by 0.7 per cent in the June quarter after rising 1.9 per cent in the March quarter.

• The economy grew by a record 9.6 per cent in the year to June. Growth has averaged 2.3 per cent over the decade and growth averaged 2.5 per cent over the last 15 years.

• Over 2020/21, the economy grew by 1.4 per cent.

• As at June 2021, the Australian economy was valued at $2,068.1 billion.

• The non-farm economy grew by 0.6 per cent in the June quarter after growing by 1.8 per cent in the December quarter. Non-farm GDP is up 8.9 per cent over the year.

• Farm GDP rose by 1.5 per cent in the June quarter to be up by 48.3 per cent over the year – the fastest growth in 17 years.

• At current prices, GDP grew by 3.2 per cent in the June quarter after rising by 3.7 per cent in the March quarter. Nominal GDP grew by 16.4 per cent on the year (decade average +3.9 per cent).

• Incomes: Corporate profits rose by 6.4 per cent in the June quarter with the wage bill up 1.3 per cent and taxes up 12.7 per cent.

• GDP per capita grew by 0.4 per cent in the June quarter to be up 9.4 per cent on the year.

• Contribution to the overall result: The biggest contributions to GDP growth came from household spending (+0.6 percentage points); public investment (+0.4pp); government consumption and private investment (both +0.3pp). Detracting from overall GDP growth was net exports (-1.0pp) and inventories (-0.2pp).

• Inflation & wages: In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.6 per cent in the June quarter. Annual growth lifted from a 57-year low of 0.3 per cent to 1.5 per cent. Real non-farm unit labour costs rose by 0.5 per cent in the June quarter to be up 6.8 per cent over the year.

• Household savings ratio. The household saving ratio eased from 11.6 per cent in the March quarter to 9.7 per cent in the June quarter.

• The terms of trade rose by 7.0 per cent in the June quarter to record highs and was up 24.1 per cent on the year.

• Productivity: GDP per hours worked fell by 1.2 per cent in the June quarter to be down by 0.7 per cent on the year. Gross value added per hours worked in the market sector fell by 1.3 per cent in the quarter to be down 1.9 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 June quarter: NSW (up 2.2 per cent); Victoria (up 1.4 per cent); Queensland (up 2.0 per cent); South Australia (up 1.8 per cent); Western Australia (up 1.2 per cent); Tasmania (up 1.4 per cent); Northern Territory (up 5.3 per cent); and the ACT (up 0.9 per cent).

• Consumer spending: Household spending rose by 1.1 per cent in the June quarter to be up 15.4 per cent for the year.

• Industry sectors: Seventeen of the 19 industry sectors grew in the June quarter. The biggest contribution to the overall increase in output came from Administrative and Support Services (+0.2 percentage points); Six other sectors added 0.1 percentage point to growth. Mining subtracted 0.1pp from growth. In percentage terms the biggest rise was in Administrative and Support Services (up 6.2 per cent), ahead of Transport, Postal and Warehousing (up 3.7 per cent).

Final thoughts

• The economic support and recovery plan is working. The aim has been to keep business in business and keep workers in their jobs.

• If businesses are supported by government spending while lockdowns are imposed then they hold on to workers. If the workers have jobs and have some money coming in then they are likely to spend it. The money flows back to business, boosting revenues and profits. And then the companies are taxed on their increased earnings and money flows back to the government.

• The merry-go-round will have to stop, but that is when vaccination rates allow economies to re-open and there isn’t the threats of further significant lockdowns. And at some points foreign borders open and then there are leakages again overseas as well as income flowing in from migrant workers, students and tourists.

• So far, so good.

Published by Craig James, Chief Economist, CommSec