Is Australia growing too fast?

B2B Editor2 March 2017

Is Australia growing too fast?

Yesterday’s December Quarter National Accounts shows that our economy rebounded strongly from the unexpectedly weak result in September, growing at 1.1 per cent in the December quarter. This is well above market expectation and results in an encouraging 2.4 per cent growth through the 2016 calendar year.

Once again, Australia is growing faster than every G7 economy. Our growth continues to be above the OECD average and confirms the successful change that is occurring in our economy as we move from the largest resources investment boom in our history to broader-based growth.

This is also the first time growth in state final demand has been experienced in all states and territories, including in Western Australia since 2010.

This growth is welcome, however we must continue to remember that it cannot be taken for granted even as we are in the midst of our 26th year of continuous economic growth. We also recognise this growth is not being experienced by Australians in all parts of country in the same way.

The Government is acutely aware of these differences and last year tasked the Productivity Commission to examine these differences in order to better understand how we can target Government policy to address the economic challenges in these areas into the future.

The Government works for and welcomes growth, more inclusive growth in our economy is impossible without it, but we will continue to work to ensure all hard working Australians and their families benefit from it.

Encouragingly, economic growth in the December quarter was broad‑based across each of its components.

Growth was principally driven by a solid rebound in household consumption demonstrating that despite subdued wages growth, Australian households are continuing to express confidence in our economy, which is also reflected in the lower household savings ratio.

Household consumption rose 0.9 per cent in the quarter and contributed 0.5 percentage points to growth, double the result in the last quarter. Consumption rose 2.6 per cent through the year.

Continued growth in consumption is supporting our economy as we absorb the significant changes taking place as we transition from a once in a lifetime mining investment boom to a broader-based economy.

Similarly, dwelling investment rebounded in the quarter, increasing by 1.2 per cent in the December quarter to be 5.6 per cent higher over the year. Continued increases in housing supply are expected to continue for several quarters as there remains a considerable pipeline of work yet to be commenced.

Most significantly, after 12 consecutive quarters of decline it was encouraging to see new business investment increase, up almost 2 per cent over the quarter. This included a 1.3 per cent improvement in new engineering construction and 5.0 per cent increase in new building construction

This positive outcome reflects an improvement in business sentiment in recent months. It follows a weak outcome in the September quarter weighed by temporary weather-related disruptions in construction.

While we welcome this result, to lift wages and increase jobs for Australians the Government must continue to pursue policies that encourage investment. Our Enterprise Tax Plan, combined with our innovation and science investments, infrastructure spending to lift productivity and our defence investments, are all designed to drive investment.

Public investment also grew by 7.7 per cent in the quarter, especially driven by the Commonwealth including spending on the second NBN satellite, as well defence aircraft, and state and local infrastructure investment.

Net exports contributed 0.2 percentage points to growth. Exports grew by 2.2 per cent in the quarter to be 8.9 per cent higher over the year, with robust growth in resource exports, particularly metal ores and mineral fuels, as the economy transitions into the production phase of the mining boom. Service exports also rose an encouraging 8.6 per cent over the year, with tourism and education exports continuing to perform well. Rural exporters also experienced a good quarter, following the record grain harvest, with exports up 8.3 per cent in this quarter alone.

Higher volumes were also coupled with higher prices.

For the third successive quarter the terms of trade increased, on this occasion by just over 9 per cent, the largest quarterly growth since June 2010.

The terms of trade, coupled with strong growth in volumes, has contributed to some solid dividends.

Nominal GDP grew 3.0 per cent in the quarter to be 6.1 per cent higher through the year. The increase in the quarter was the fastest pace in six and a half years.

Secondly, the current account deficit narrowed to its lowest share of GDP since 1980, at $3.9 billion in the December quarter (0.9 per cent of GDP). This reflected an improvement in the trade balance to a record $4.7 billion surplus.

And thirdly, this combination had a significant impact on company profits, especially in the resource sector. However it would be wrong to assume that these gains were experienced evenly across all businesses.

It is important to note that this one quarter of strong growth in mining profits comes after many quarters of subdued profits growth and reflects in large part the recovery in global commodity prices that took place late last year.

Of concern in today’s figures is that compensation of employees declined by 0.5 per cent in the quarter. Despite being up 1.5 per cent through the year, and more jobs added in the quarter, modest wage increases and compositional changes meant this quarter’s result was disappointing.

This is why the core task of the Turnbull Government remains increasing what hard working Australians can earn. This means generating more hours and more jobs in our economy. You can’t achieve these outcomes without growth and without businesses investing in their future, to support the jobs and wages that Australians rely on.

That said, the improvement in the terms of trade has also benefited national income. Real net national disposable income per capita – a measure of living standards – increased 2.5 per cent in the quarter to be 5.3 per cent higher over the year. This represents the annual strongest growth in our income in five years.

However, the Government will not be complacent and rely on commodity prices remaining at current levels to do the hard work on the Budget. The Turnbull Government will continue to take the necessary steps to keep our expenditure under control, to boost investment, to maintain our AAA credit rating and ensure that we are able to sustainably fund necessary government services not just now but in the future.

Yesterday’s results were a positive sign that our economy maintains solid momentum that has already delivered us more than 25 years of continuous growth. But as the last quarter reminded us, it cannot be taken for granted.

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