Australia posts yet another strong growth quarter

Photo: Torsten Blackwood/AFP/Getty Images

Australia has now gone 25 years without being in recession.

According to data released by the Australian Bureau of Statistics (ABS) earlier today, real Gross Domestic Product (GDP) rose by 0.5% in the June quarter, slightly below expectations for an increase of 0.6%.

It saw the year-on-year growth rate accelerate to 3.3%, the fastest seen in four years. It was in line with economist forecasts, and well above the 2.75% pace now deemed by many to be Australia’s new trend growth rate.

The March quarter GDP growth rate, previously reported as an increase of 1.1%, was revised down to 1.0%.

On an annualised basis, the economy grew by 2.9% in real terms during the 2015/16 financial year.

The economy has now gone 100 quarters without experiencing a technical recession, defined as two consecutive quarters of negative economic growth.

It is now closing in on the modern day record of 103 quarters held by the Netherlands which ran from 1982 to 2008.

According to the ABS, “growth in the June quarter was driven by domestic final demand, which rose 0.6 per cent, supported by ongoing growth in household and public consumption. Total investment was flat in the quarter, with the continued reduction in engineering construction associated with the mining sector offset by growth in public investment”.

In line with the net exports figure released on Tuesday, it also noted that “international trade detracted from growth in the quarter due to strong growth in imports and a slowing in the rate of growth in exports”.

This component contributed heavily to the large increase seen in the March quarter GDP figure.

The table below from the ABS breaks down the individual contribution to quarterly GDP in seasonally adjusted chain volume terms. We’ve highlighted the individual contributions, shown in the far right of the table.

The ABS notes that household final consumption expenditure — the largest component within GDP — grew by 0.4% for the quarter, leaving the annual increase up 2.9% from Q2 2015. It contributed 0.2 percentage points (ppts) to the overall GDP figure.

Government consumption expenditure jumped 1.9% over the same period, adding 0.3ppts to GDP.

Gross fixed capital formation came in flat for the quarter with a surge in public investment offsetting weakness in the private sector.

“Public investment increased 15.5%, driven by state and local general government (21%),” noted the ABS. “In part this reflected the transfer of assets from the private sector, which contributed to a fall of 3.4% in private investment.”

A one-off boost, in other words. In overall terms, government investment contributed a hefty 0.7ppts to real GDP.

On the other side of the ledger, private investment was dragged lower by a decline in non-dwelling construction which fell by 12.4%. This was partially offset by an increase in dwelling and machinery and equipment investment.

The lift in dwelling construction was largely driven by renovations, rather than the construction of new dwellings.

The collapse in non-dwelling construction, associated with the unwinding mining infrastructure boom, detracted 0.8ppts from GDP alone.

Though ugly, this drag on growth is now likely to ease in the quarters ahead.

Thanks to a downward revision to the March quarter figure, inventories contributed 0.3ppts to the quarterly growth. Net exports sliced 0.2ppts from GDP, with a 0.3ppts contribution from exports overridden by a 0.5ppts detraction from imports.

Reflective of the recent boost in commodity prices, nominal GDP — adjusted for price movements — rose by 1.3% over the quarter, leaving it up 3.4% compared to the same quarter a year earlier.

It was the largest quarterly gain since late 2013, suggesting that the hit to national incomes from falling commodity prices may be coming to an end.

Reflecting this, Australia’s terms of trade rose by 2.3% over the quarter, adding to income growth for the first time in three years.

Though a solid result, Michael Blythe, chief economist at the Commonwealth Bank, believes the data only confirms the dilemma facing policymakers right now: growth is solid but inflationary pressures remain weak.

“Growth may be above trend, but it is not generating much in the way of inflationary pressures,” he wrote following the release of the report.

“The chain price index for domestic final demand, the best measure of broader inflation trends, is running at only 1.1%pa. Average earnings are growing at a sluggish 1.5%pa and unit labour costs continue to track sideways.

“Inflation restraint will persist against that backdrop,” he added.

Despite economic growth now running well above trend, Blythe maintains the view that RBA will cut rates again this year at its November meeting.

“The policy squeeze between reasonable economic growth and very low inflation has been resolved so far in favour of rate cuts. And we expect a further 25bpt cut in November, taking the cash rate to a new record low of 1.25%.

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