Shoppers return to power Australian economic growth

killerb10/Getty ImagesIt’s time to grade the Australian economy.
  • Australian economic growth rose by 0.9% in the June quarter, above the 0.7% pace expected.
  • Growth was primarily powered by spending by households and government which contributed two-thirds of the quarterly increase.
  • The upside surprise saw year-ended growth surge to 3.4%, the fastest pace in nearly six years.

Australian economic growth surprised to the upside in the June quarter, thanks largely to increased spending by households.

According to the Australian Bureau of Statistics (ABS), real GDP grew by 0.9% in seasonally adjusted chain volume terms, leaving the increase on a year earlier at 3.4%.

The year-ended rate was the fastest since the September quarter of 2012.

Markets had been expecting a quarterly increase of 0.7%, leaving the change on a year earlier at 2.8%.

Growth in the March quarter, previously reported at 1%, was revised up to show an increase of 1.1%, contributing to the strength seen in the year-on-year rate.

Combined, GDP growth in the first half of the year topped 4% in annualised terms, well above the 2.75% level where unemployment and inflationary is expected to be stable.

That pace, if sustained in the coming quarters, would also be well above the 3.25% level forecast by the RBA this year.

“Growth in domestic demand accounts for over half the growth in GDP, and reflected strength in household expenditure,” said Bruce Hockman, Chief Economist for the ABS.

“Domestic demand increased 0.6% for the quarter, driven by a 0.7% in household consumption, with increased expenditure on both discretionary and non-discretionary goods and services.

“This was driven by rises in food (1.3%), recreation and culture (1.0%) and insurance and other financial services (0.9%). There were falls in purchase of vehicles (-1.8%), transport services (-0.5%) and hotels, cafes and restaurants (-0.3%).”

The increase in household consumption added a chunky 0.4 percentage points (ppts) to headline quarterly growth.

Helping to fuel the increase in household consumption — the largest part of the Australian economy — households saved less and spent more, resulting in the household savings ratio tumbling to just 1%, the lowest level since December 2007.

“Moderate growth in household disposable income coupled with strength in household consumption resulted in a decline in the household saving ratio,” the ABS said.

The ABS said compensation of employees (COE) — including changes in both wages and employment — grew by 0.7% during the quarter, leaving it up 4.8% over the year.

“Health care and social assistance, construction and public administration and safety were the major contributors to this growth,” the ABS said.

With wage growth, as measured by the ABS Wage Price Index, lifting 2.1% over the year, most of the increase came from higher levels of employment, rather than a meaningful increase in wages.

ABS

Along with stronger spending by households, government expenditure rose by 1% for the quarter, adding an additional 0.2ppts to the quarterly figure.

Dwelling investment and trade also chimed in, adding 0.1ppts apiece to the quarterly increase.

Non-dwelling investment, along with business investment, detracted form growth during the quarter, lopping 0.1ppts each from the figure.

Inventories, having contributed to growth in previous quarters, did not do so on this occasion.

An adjustment to account for stronger quarterly growth in the income and production measures of GDP also accounted for a large 0.2ppts boost to the quarterly result.

“The expenditure detail for the June quarter is less impressive than the headline result,” said Andrew Hanlan, Senior Economist at Westpac.

“The expenditure estimate of GDP was a 0.7% for Q2.

“It was the income and production estimates of GDP that provided the upside surprise at 0.9% and 1.0% respectively.

Nominal GDP — including both volumes and price movements seen during the quarter — grew slightly faster than the increase in real GDP, rising by 1% from March.

Over the year, it accelerated to 5.5%, the fastest increase since the September quarter last year.

Nominal GDP is the broadest measure of income in the economy, and therefore has implications for government tax revenues. It also helps to explain why Australia’s budget bottom line has been improving.

Reflecting the impact of population growth, real GDP per capita grew by 0.5% over the quarter, and by 1.8% over the year.

The year-ended rate was a small improvement from the 1.6% pace seen in the year to March, and well above the 0.8% increase seen in the 12 months to December last year.

GDP per hour worked — also a measure of productivity — actually fell by 0.2% during the quarter. Over the year, it increased by 1%, the same pace seen in the year to March.

Real net national disposable income — deemed to be a measure of national living standards — rose by 0.3% after surging 2.4% in the March quarter, leaving the increase on a year earlier at 3.7%.

The latter was the fastest increase since the September quarter last year.

In per capita terms, it fell by 0.3% for the quarter. However, that comes with the caveat that it surged by 2% in the three months to March. Over the year, it increased by 2%, indicating a modest lift in living standards for individual Australians.

Like a majority of economists, the bumper quarterly increase in real GDP surprised Paul Dales, Chief Australia and New Zealand Economist at Capital Economics.

“There’s no denying that the first half of the year has been very good,” he said following its release.

“The Q2 rise and upward revision to the Q1 gain leaves the economy on track to grow this year by much more than our 2.5% forecast, and by close to the RBA’s 3.25% forecast.”

However, with savings levels now incredibly low, at a time when employment growth is slowing and home prices are falling in many parts of the country, Dales says the outlook still remains uncertain despite the performance seen in the first half of the year.

“Our big concern is that at some point households will falter in the face of low income growth, falling house prices, tightening credit conditions and rising mortgage rates,” he says.

“The further fall in the household saving rate indicates they may have overextended themselves. The global environment is becoming less supportive too.”

While the RBA will undoubtedly be pleased with today’s result, Dales doesn’t believe it will see the RBA deliver an earlier-than-expected increase in official borrowing costs.

“As the RBA has been expecting the economy to perform well, today’s data doesn’t mean it is suddenly going to rush to raise interest rates,” he says.

“But the markets may start to reconsider their view that interest rates won’t rise until sometime in 2020.”

It appears that reassessment is already taking place with the Australian dollar lifting sharply, and government bond futures weakening modestly, in response to the report.

However, the moves so far have been limited in scale suggesting investors, like Dales, are still cautious about what potentially lies ahead.

Gareth Aird, Senior Economist at the Commonwealth Bank, said that while external factors can’t be controlled, confidence towards the domestic outlook would be helped by a further strengthening in wage pressures.

“Confidence in the outlook would improve if the robust economy flowed through to a lift the pay packets of workers,” he said.

“The income side of the ledger showed that employers currently have it better than employees.

“Company profits rose by 1% in Q2 to sit 8.8% higher through the year. In contrast, compensation of employees, which is basically the total income paid to workers, grew by a more sedate 0.7% over the quarter.”

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