GDP: Australia's economic growth picks up on consumer spending, but can the good times last?

Updated

Australia's quarterly economic growth rate more than doubled last quarter, but half the expansion was due to increased consumer spending, which itself was based on a potentially unsustainable drop in the savings rate.

Key points: GDP rebounds from weak first quarter, driven by 0.7pc rise in household spending

Increased spending has pushed household savings down to a nine-year low

Government points to higher business investment as a positive sign

Australia's economy grew 0.8 per cent in the three months to June, and 1.8 per cent over the past year, according to the official gross domestic product numbers from the Bureau of Statistics.

The June quarter growth rate was a big pick-up from the 0.3 per cent growth recorded in the first quarter of the 2017 calendar year.

However, there are signs that the current level of economic expansion might be unsustainable.

Domestic spending was a key contributor to growth, rising 1 per cent over the quarter driven by a 0.7 per cent rise in household consumption, which accounted for half of the overall increase in GDP.

The ABS said some of the strongest growth was spending on food, clothing and household furnishings.

But this spending came out of a dramatic decline in the household savings rate, which fell to 4.6 per cent from 5.3 per cent in the March quarter.

Dwelling construction also grew slightly, rising 0.2 per cent, but many economists believe it is already starting to decline from a record peak.

Paul Dales from Capital Economics said the 0.6 per cent growth average over the first two quarters provides a more accurate picture about the economy's current health.

"The rebounds in both consumption and dwellings investment didn't reverse all of the previous weakness, which supports our view that more fundamental factors will continue to weigh on these areas over the next couple of years," he said.

"The rise in consumption was largely due to yet another fall in the saving rate, from 5.3 per cent to 4.6 per cent.

"Households won't be willing to reduce it much further now that house prices are rising at a slower rate and may soon stagnate.

"And a weaker housing market will soon mean that dwellings investment becomes a persistent drag on growth."

Households face renewed decline in incomes

On the face of it, incomes appeared to rise — "compensation of employees" increased 0.7 per cent in the quarter.

However, that was entirely driven by an increase in employment, with earnings per employee down 0.1 per cent.

The population increase contribution to economic growth was highlighted by per capita GDP growth that was half the headline rate at 0.4 per cent.

There was also a slight decline in nominal GDP growth over the quarter — that is a measure of how much Australia earned for what it produced, not just how much it produced.

This was the result of a fall in commodity prices wiping 6 per cent from Australia's terms of trade, according to the bureau's chief economist Bruce Hockman.

"Recent swings in coal and iron ore prices have had significant effects on the Australian economy in terms of export revenues and real incomes, though export volumes continued to grow in the June quarter," he wrote in the report.

The combination of falling national incomes and strong population growth saw real net national disposable income per capita — the bureau's preferred measure of living standards — plunge 1.4 per cent during the June quarter after five quarters of growth.

Business invests in non-mining recovery

On a more positive note, businesses increased their investment, raising the hope that jobs growth will continue to strengthen.

"Recent indicators showing increased business confidence appear to be reflected by the 3.2 per cent quarterly increase in purchases of new machinery and equipment as well as increases in the previously published June quarter employment and hours worked estimates," Mr Hockman observed.

Treasurer Scott Morrison said the Federal Government's infrastructure and defence spending helped boost growth.

"New private business investment expanded by 1.1 per cent through the quarter and that is the third quarterly consecutive increase that you can see here," he said.

"That followed many, many, many quarters, 12 or thereabouts, of negative quarters of private investment.

"To see that now go up for the last three quarters is a very encouraging sign given that has been a strong focus, indeed I'd say the priority focus, of the national economic plan we have been pursuing."

Can the momentum be sustained?

NAB chief economist Alan Oster said, while there were positive signs in the data, questions remained over whether the momentum will continue.

"Particularly when the outlook for key pillars of growth such as wages and consumer spending are clouded amidst structural changes in the labour market and high household debt levels, the exchange rate has risen, and there is a risk that the dwelling construction cycle may be peaking earlier than expected," he said.

Weak GDP readings from the third quarter last year and first quarter this year will wash out of the annualised result, leading to a likely temporary uptick in growth, Mr Oster noted

"Looking forward, year-ended growth is expected to pick up to above 3 per cent in the second half, as LNG exports add further to growth, before easing back a little through 2018."

With questions about the quality and sustainability of many of the growth drivers, few — if any — economists see the data as a signal for the Reserve Bank to resume raising rates again, despite the market pricing in a full 25-basis-point rise by the end of next year.

"Growth was broadly based but was driven by a combination of strong public investment and net exports, moderate public consumption and household consumption and soft business investment," Citi's Josh Williamson wrote in a research note.

"As expected from last week's construction data, dwelling investment failed to recover from the decline in the first quarter while non-dwelling construction and inventories detracted from growth.

"On the downside, though, there's unlikely to be another repeat of the strong public investment that was largely driven by defence spending."

Mr Williamson said it was possible GDP could pick up to the Reserve Bank's forecast of annualised growth of around 2.75 per cent by the end of the year, but it would take a bigger spending spree from consumers, and that was unlikely.

Topics: economic-trends, business-economics-and-finance, australia

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