AUSTRALIA'S ECONOMY STORMS BACK

Photo by Paul Kane/Getty Images

SYDNEY — Australia’s economy returned to growth in the final three months of 2016, extending its run without experiencing a technical recession to 25.5 years.

According to the ABS, GDP grew by 1.1% in seasonally adjusted chain volume terms during the December quarter, seeing the year-on-year rate rise to 2.4%.

It was the equal-fastest quarterly increase since the September quarter of 2011.

Markets had been expecting a quarterly increase of 0.8%, with year-on-year growth rising to 2.0%.

The rebound followed a 0.5% contraction in the September quarter that was unchanged from the previous estimate.

Nominal GDP — taking into account both volumes and price movements — jumped by a larger 3.0% over the quarter, the largest increase since the June quarter of 2010.

That left the increase on the same quarter in 2015 at 6.1%, the fastest increase since the September quarter 2011.

Consumption surge

Now, like then, booming commodity prices were largely responsible for the increase, helping to boost national incomes in the process.

According to the ABS, household final consumption expenditure — the largest component within GDP — contributed 0.5 percentage points to growth, helping to explain the significant beat on the headline figure.

In percentage terms, consumption rose by 0.9% for the quarter, driven by increased spending on food, recreation and culture and insurance and other financial services.

Helping to explain the resilient performance from consumption, the household savings rate tumbled, dropping to 5.2% from 6.3% in the prior quarter.

That’s the lowest level since the September quarter of 2008, and is now well down from the pre-crisis peak of 10.9% recorded just one quarter later.

It has been as high as 10.1% in the June quarter of 2012.

“This decline was driven by weak growth in household Gross disposable income of 0.2% while household spending lifted to 1.2% from subdued growth of 0.6% in the previous quarter,” said the ABS.

Amidst weak wage and incomes growth in recent years, Australians are now spending more on purchases but saving less.

The weakness in household disposable income was impacted by a decline of 0.5% in the level of salaries and wages paid to employees. The decline was the first since the September quarter 2012, and left growth over the year at just 1.5%.

The result was due to record-low wage growth over the past year, coming in at just 1.9% based on the latest Wage Price Index released by the ABS.

Elsewhere, net exports contributed 0.2 percentage points while both public and private investment contributed 0.3 percentage points, having detracted from growth in the September quarter.

The ABS said that private investment increased 1.5% with non-dwelling construction up 2.3%. The increase in the latter was significant as it was the first increase since the June quarter 2014.

Inventories, as expected, detracted 0.2 percentage points from GDP during the quarter.

This table from the ABS shows the contribution breakdown by component in expenditure terms. We’ve highlighted the contribution to quarterly GDP growth on the right-hand side.

Source: ABS

From a production basis, growth was recorded in 15 out of 20 industries during the quarter, led by mining, agriculture, forestry and fishing and professional scientific and technical services which contributed 0.2 percentage points to GDP growth.

That helped to offset declines of 0.1 percentage points in manufacturing, construction and administrative and support services.

Source: ABS

While uneven in nature, there was also good news when it came to the performance of Australia’s states and territories will final state demand all increasing during the quarter, led by the Northern territory at 3.7%.

Of the larger states, final demand increased by 1.7%, 0.9% and 0.8% respectively in Victoria, Queensland and New South Wales.

Source: ABS

Michael Blythe, chief economist at the Commonwealth Bank, said his initial impression of the GDP report is of an economy “gathering a little momentum, and one that is on the way towards a more respectable 3% per annum growth rate later in 2017.”

“The main growth themes were still in place at the end of 2016,” said Blythe.

“Growth is supported by the ramping up in resource exports, the residential construction boom, higher public spending and some surprising growth in consumer activity. Falling mining capex and weak non mining capex remain the main growth drags.”

While real GDP outperformed expectations by some margin, Blythe said that it was the nominal increase in GDP that was the standout item in today’s report.

“The ‘income recession’ of the past few years is over!,” he says.

“The boost is particularly evident in the profit related components of GDP. And there are some very early indications that government revenues are starting to benefit.”

As such, he said that policymakers “should be happy with today‚Äôs numbers”.

Following the release of the report, Scott Morrison, Australia’s federal treasurer, certainly appeared that was, pointing out that “Australia is growing faster than every G7 economy”.

“Our growth continues to be above the OECD average and confirms the successful change that is taking place in our economy as we move from the largest resources investment boom in our history to broader based growth.

“What was particularly encourage was that economic growth in the Dec quarter was more broad-based across all the contributing sectors,” Morrison said.

Although, despite the broader national performance, he said it would be wrong to assume gains have been experienced evenly by businesses across the economy.

“It is also important to note that this one quarter of strong profits growth… comes after many quarters of subdued profits growth, and reflects in large part the recovery in global commodity prices that took place late last year.”

He added a note of caution.

“We cannot be complacent and we cannot rely on commodity prices remaining at current levels to do the hard work,” Morrison said.

“We cannot base our budgets, or economic plans, on the volatility of commodity prices. We must continue to take the necessary steps to keep our expenditure under control structurally, to boost investment, to maintain our AAA credit rating… and to ensure that we are able to sustainably fund necessary government services not just now, but in the future.

“Today’s result were a positive sign that our economy maintains solid momentum in our 26th year of annual economic growth. But as the lat quart reminded us, you can never take anything for granted and the government has doubled down on its efforts.”

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