by Craig James

Another quarter of growth: The record-breaking economic expansion is in its 23rd year. The Australian economy grew by 1.1 per cent in the March quarter (fastest rate in two years) after a 0.8 per cent increase in the December quarter (forecasts centred on a 0.9-1.0 per cent rise). The economy has grown 3.5 per cent over the past year, above the decade-average growth rate of 2.9 per cent and the 15-year average of 3.1 per cent.

Contribution to growth: The biggest contributions to growth came from net exports (+1.4 percentage points) followed by household consumption (+0.3pp), dwelling investment (+0.2pp) and government consumption & private equipment investment (both +0.1pp). The biggest drag on growth was by inventories (-0.6pp).

States & territories: The Bureau of Statistics has ceased publishing data on state & territory exports & imports. In terms of state final demand, NSW had the fastest quarterly growth in the March quarter (up 2.4 per cent), followed by Tasmania (up 0.8 per cent), Victoria (up 0.7 per cent). State final demand fell the most in the Northern Territory (down 6.5 per cent) followed by Western Australia (down 1.5 per cent), Queensland (down 0.8 per cent), the ACT (down 0.2 per cent) and South Australia (down 0.1 per cent).

Industry sectors: Twelve of the 19 industry sectors expanded in the March quarter, led by Mining, up 8.6 per cent.

Productivity: Gross value added per hours worked in the market sector rose by 1.0 per cent in the March quarter after 0.9 per cent growth in the December quarter. Annual productivity growth stands at 2.7 per cent.

Household spending: Only six of the 17 sectors recorded weaker spending in the quarter. Household spending rose by 0.5 per cent in the March quarter after 0.8 per cent growth in the December quarter. Annual growth stands at 2.8 per cent. Hotels, cafes & restaurants rose by 3.6 per cent but Cigarettes & tobacco fell the most, down by 7.6 per cent.

What does it all mean?

The latest data serves as a wake-up call. Despite some perceptions to the contrary, the Australian economy is doing well. In fact it’s doing very well. The economy is growing comfortably above its trend or “normal” pace; inflation is under control; interest rates are at historic lows; productivity is solid; and home construction and exports are leading the way forward. There are plenty of reasons for Australians to be celebrating our good economic circumstances.

It is not to say that there aren’t challenges. The population is ageing and this provides challenges for future revenues and spending. Over the next few years it will be important that non-partisan discussions are conducted about tax structures and entitlements.

The Reserve Bank is likely to be pleasantly surprised about the latest economic growth results, previously expecting 3.0 per cent growth in the June quarter. Growth now looks like being closer to 3.25-3.50 per cent.

Last quarter we noted that “Overall, the economy is lifting and heading back to a “normal” 3.0 per cent trend pace.” Indeed that “normal” pace of economic growth has now been achieved. The good news is that near-record dwelling approvals points to stronger home construction ahead. Economic momentum will also be supported by state and territory infrastructure spending and firmer exports. Productivity is also solid – expanding at a 2.9 per cent average pace over the past three years. The main risk is politics, especially a prolonged process of passing the current Budget, affecting business and consumer spending.

CommSec believes that the next move in interest rates is up – but there is no rush. Rates could start their return to more “normal” levels late this year or early next year.

What do the figures show?

National Accounts:

Economic Growth: The economy grew by 1.1 per cent in the March quarter, after 0.8 per cent growth in the December quarter.

Annual economic growth lifted from 2.7 per cent to 3.5 per cent – the fastest pace in two years and above the long-term average of 3.00-3.25 per cent. Long-term productivity growth is around 2.0 per cent with population growth near 1.8 per cent, indicating scope for the economy to grow around 3.5-4.0 per cent without sparking inflation.

The non-farm economy grew by 1.2 per cent in the March quarter after a 0.8 per cent lift in the December quarter. Annual growth stands at 3.5 per cent.

Farm GDP fell by 1.7 per cent in the March quarter after falling 0.3 per cent in the December quarter but was still up 4.5 per cent over the year.

At current prices, GDP grew by 1.1 per cent in the quarter and by 4.9 per cent over the year. But the annual growth rate is still below the decade average of 6.4 per cent. Over the year to the March quarter, the Australian economy was valued at $1,574 billion.

Growth drivers: The biggest contributions to growth came from net exports (+1.4 percentage points) followed by household consumption (+0.3pp), dwelling investment (+0.2pp) and government consumption & private equipment investment (both +0.1pp). The biggest drag on growth was by inventories (-0.6pp).

Inflation: In terms of domestic price pressures, the household consumption implicit price deflator was up by 0.6 per cent in the March quarter with annual growth at 2.8 per cent. Real non-farm unit labour costs fell by 1.0 per cent in the March quarter after falling 1.3 per cent in the December quarter (the largest fall in three years). Real non-farm unit labour costs were down 1.5 per cent over the year.

Productivity: Gross value added per hours worked in the market sector rose by 1.0 per cent in the March quarter after rising by 0.9 per cent in the December quarter. Annual growth rose from 1.9 per cent to 2.7 per cent. GDP per hour worked rose by 0.2 per cent in the quarter to be up 2.2 per cent over the year.

States & Territories: The best description of the performance of States and Territory economies is state final demand plus net exports. But the Bureau of Statistics has discontinued publishing state exports and imports, making it harder to track performance. In terms of state final demand, NSW had the fastest quarterly growth in the March quarter (up 2.4 per cent), followed by Tasmania (up 0.8 per cent), Victoria (up 0.7 per cent). State final demand fell the most in the Northern Territory (down 6.5 per cent) followed by Western Australia (down 1.5 per cent), Queensland (down 0.8 per cent), the ACT (down 0.2 per cent) and South Australia (down 0.1 per cent).

Consumer spending lifts. Household consumption rose by 0.5 per cent in the March quarter after growing 0.8 per cent in the December quarter. Annual growth stands at 2.8 per cent. Only six of the 17 sectors recorded weaker spending in the quarter. Hotels, cafes & restaurants rose by 3.6 per cent but Cigarettes & tobacco fell the most, down by 7.6 per cent, with Transport services down 3.8 per cent.

Industry sectors: Twelve of the 19 industry sectors expanded in the March quarter. Mining grew by 8.6 per cent, contributing 0.9 percentage points (pp) to growth in the quarter. Construction and Finance & insurance services both added 0.2pp to growth with Health care and social assistance; Accommodation and food services; and Rental, hiring and real estate services all adding 0.1pp. Transport, postal and warehousing; and Professional, scientific and technical services both cut 0.1pp from growth.

Other points:
Profit share is steady. In seasonally adjusted terms, the ratio of profits to total factor income was steady at 27.4 per cent in the March quarter. The wages share fell from 53.2 per cent to 53.0 per cent.
Household savings ratio edged higher. The household saving ratio edged higher from 9.6 per cent to 9.7 per cent in seasonally adjusted terms in the March quarter. In trend terms household saving was steady at 9.7 per cent in the March quarter.
Imports lift as a share of spending. The imports to sales ratio rose from 0.380 in the December quarter to 0.384 in the March quarter.
The inventory to sales ratio fell to record lows, dropping from 0.637 in the December quarter to 0.620 in the March quarter.

What is the importance of the economic data?

The quarterly National Income, Expenditure and Product release (national accounts) from the Bureau of Statistics is the most complete assessment of Australia’s economic performance. Detailed estimates are provided on incomes (wages, profits), spending (such as household, dwelling investment and trade (exports and imports) and production (comparing industry performance). Other data includes household saving and the economic performance of States and Territories.

The main use of the national accounts figures is as a historical record of economic performance. The information has little forward-looking value for currency, interest rate or share markets.

What are the implications for interest rates and investors?

The national accounts data is backward looking. But the data is taken into account by the Reserve Bank, serving as a base for forecasts. The Reserve Bank had tipped 3 per cent economic growth by the June quarter, but that estimate could prove conservative. Federal Treasury expects the economy to slow from 2.75 per cent in 2013/14 to 2.5 per cent growth in 2014/15. Again, this looks conservative. If the out-performance continues then the Budget will improve and the Reserve Bank will give more thought to lifting interest rates to more “normal” levels.

CommSec thinks that the Reserve Bank could start lifting interest rates late this year or early next year. But at present there is no rush. The “speed limit” of the economy is around 3.5-4.0 per cent. After hitting 3.5 per cent growth this quarter, growth will probably ease to around 3.25 per cent in the June quarter. In short, good growth for job creation but not fast enough to boost inflation.

Overall, official cash rates may rise from 2.5 per cent to 3.5 per cent by end 2015.

The economy is tipped to grow by 3.2 per cent in 2014 and 2.9 per cent in 2015.

The outlook for job-hiring businesses and housing-dependent retailers remains positive. It is also important to note that the extra dollars earned from exports will circulate across the economy, assisting shareholders, mining employees, mining services companies and a raft of regional towns.

The state final demand figures don’t provide a good estimate of regional economic conditions. Exports are soaring in Western Australia and Northern Territory, but aren’t being picked up in growth estimates. Australia needs quarterly state GDP figures.