The previous accounts for the September quarter had revealed a rare fall in real GDP, the worst result since the dark days of the GFC. This shock result had triggered speculation that Australia was dipping into the recession, something we had managed to avoid for the previous quarter of a century. More timely data for Q4 had indicated this was not happening, however, a reality now confirmed by today’s fourth quarter accounts.
In fact, growth in the economy last quarter was much firmer than the consensus of surveyed economists had anticipated. Australia’s economy grew a healthy 1.1%q/q in real terms last quarter, against expectations of (only) a 0.8% rate of expansion. This comes after the surprise 0.5%q/q fall in Q3. The bounce in real GDP in Q4 takes annual growth in the economy back to 2.4%, still below our potential growth rate of about 3%, but a big improvement on the soggy 1.9% annual rate reported in the year to Q3.
The dive in real GDP in the September quarter had been the result of a “perfect storm” of one-off negative factors, all of which were reversed in Q4. The economy still has some problems, particularly weak business investment and the maintenance of sub-potential growth, but we are a long way from recession. Indeed, the early data already released for the March quarter suggests the economy continues to transition successfully to more non-mining sources of growth. Moreover, there are welcome signs that national income is rising again.
The underlying details were decent, too. Household spending, the largest single contributor to GDP, added 0.5% points to growth in the economy, helped by a fall in the savings rate. Also, public investment rose (having dipped in Q3), home construction lifted (having also fallen in Q3), and net exports also added to growth, albeit modestly – this measure similarly had subtracted from GDP growth in Q3. Private business investment also rose. The only sober news was a slide in inventories, but this may herald faster production ahead as stocks are replenished.
While the news today on volumes was more than decent, the nominal side of the accounts was even better – substantially so. Nominal GDP, for example, surged 3%q/q over the quarter, the fastest rate of expansion since 2010. This led to a huge rise in real net national income per head of population, which previously had been a material drag on household spending, in particular. The terms of trade – the ratio of export prices to import prices and a decent gauge of living standards – soared more than 9% over the quarter, thanks to the bounce in commodity prices.
In terms of policy implications, today’s stellar growth data should help to bring to an end speculation that Reserve Bank officials may be in the mood to lower the cash rate again any time soon. Some economists had hinted that the shock fall in GDP in the previous quarter had set the scene for further interest rate cuts. Today’s data should end that conversation, at least for now. Moreover, the huge rise in national income should do wonders for the federal Budget’s bottom line, although we are many miles away from the oft-promised return to surplus.