One criticism often labeled at the Australian economy is that it is far too reliant upon its housing and mining sectors for growth.
A land of houses and holes, is the oft-used phrase, that overlooks other parts of economy, including Australia’s agriculture sector.
Agriculture shouldn’t be ignored if the following statistic is anything to go by.
According to Scott Haslem, George Tharenou and Jim Xu, UBS’ Australian economics team, farm production contributed more to Australian economic growth than the direct impact of housing last year.
UBS says that Q4 farm production rose by 8% during the December quarter, leaving it up a massive 24% on the same quarter a year earlier.
As a result, it contributed 0.2 percentage points (ppts) to real GDP in the December quarter, and 0.5ppts over the year, the largest amount since 2008.
It’s also worthwhile remembering that the Australian economy only grew by 2.4% last year.
Not bad for a sector that makes less than 3% of the Australian economy.
“Incredibly, this 0.5ppts contribution was larger than the ‘direct’ impact of housing on the economy, with slowing real housing activity seeing the contribution of dwelling investment moderate to only 0.3ppts, halving from the peak in Q2 2016,” said UBS.
That remarkable statistic is shown in visual form in the chart below. From UBS, it tracks the year-on-year percentage point contribution from Australia’s housing and farm sectors over the past three decades.
UBS said that farm production made the largest year-on-year contribution of any single industry in the final quarter of last year, helping to mask weakness in other sectors.
“Excluding the farm sector, non-farm GDP actually slowed sharply from over 3% year-on-year in Q2 2016 to 2% year-on-year in Q4 2016, around the weakest since the GFC,” UBS said.
While in direct terms farm production was larger than dwelling investment last year, Haslem, Tharenou and Xu point out that the latter still has a far greater influence on the broader Australian economy.
“(It) includes the spill-over to household durables consumption, and more importantly via the ‘household wealth effect’ of surging house prices leading to an ongoing sharp drop in the household savings rate, which has seen decent real consumption growth continue despite ongoing record low wages,” it says.
Looking ahead, UBS expects that the positive direct contribution made to GDP from both sectors will likely start to drag on economic activity in the period ahead.
“Looking forward, ABARES’ forecast for farm sector production growth of 8% year-on-year in 2016/17 suggests that growth of farm GDP will also likely peak in 2016/17, before probably turning negative in 2017/18,” it says.
“This implies that the maximum boost to quarterly GDP from the farm sector may have already passed, and is then set to become a drag through on overall GDP in 17/18.”
That’s also consistent with the bank’s view on dwelling investment that is says is “likely to turn negative ahead”.
That means that other sectors of the economy, such as resources exports, household consumption and non-mining business investment, will have to do more of the heavy lifting to ensure Australia’s more than 25-year run without experiencing a technical recession is maintained.