Australia's Headline Growth Masks An Underlying Deterioration In The Economy

Like losing to Richmond, not terrible but it could be better. (Getty/Michael Dodge)

Austalia’s Q2 GDP printed at the upper end of expectations with a 0.5% rate of growth in Q2 2014. It was better than the median of 0.4% but still the weakest since Q1 2013 and a big step down from the 1.1% growth rate in Q1 2014.

Looking at the break up of growth drivers in the conventional economic approach we see that it was an increase in inventories which was the big driver, contributing 0.9 percentage points to growth, while final consumption contributed 0.3 percentage points and private gross fixed capital formation (investment) also contributed 0.3 percentage points. Subtracting from growth was the detraction in net exports of 0.9 percentage points and public fixed gross capital formation which detracted 0.2% percentage points.

Source: ABS

The data shows growth is still heavily dependent on mining with the sector making the strongest contribution at 1.2 percentage points to growth in trend terms.

This is important because while mining continues to contribute strongly it gives the rest of the economy time to adjust as we are seeing with finance and construction in particular.

Worryingly though the rate of change – growth – of domestic final demand has been slowing which highlights that the transition in the economy is as difficult as the RBA has suggested.

Also suggesting that the economy needs to broaden its drivers is the fall in Australia’s terms of trade (what we pay for what we export compared with what we pay for what we import) fell 4.1% last quarter after a 7.9% fall in Q1 2014.

The impact of this the ABS says is that: “Real gross domestic income decreased by 0.3%, while the volume measure of GDP increased by 0.5%, the difference reflecting a decrease of 4.1% in the terms of trade.”

Where the rubber hits the road on this measure is that real net disposable income – the measure the ABS says “adjusts the volume measure of GDP for the terms of trade effect, real net incomes from overseas and consumption of fixed capital” – fell 0.2%. using this measure growth “over the past four quarters was 1.0% compared with 3.1% for GDP”.

Overall this GDP data is a sign that Australia has a three bears economy – not Goldilocks – some sectors are hot, some cold and some are about right.

How you feel about this number and the economic outlook will depend on where you sit in the economy.

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