The rate of growth in the economy over the past year, though, remained unimpressive at a sluggish 1.8%oya in Q2, the same rate (after rounding) as in the year to Q1, which was the weakest pace of expansion since 2009, in the aftermath of the GFC. This sub-trend growth rate reflects the poor outcomes in the last quarter and in the second half of 2016, in particular. Recall that the economy actually shrunk in Q3 last year.
The economy, therefore, still is growing below our potential growth rate – an effective speed limit - which most economists estimate to be just below 3%. We, therefore, are not fully utilising the available resources, meaning the jobless rate is unlikely to fall, unless growth accelerates, of course. It follows that the lift in wages and inflation forecast by the RBA probably remains somewhere in the middle distance. The persistence of a record low cash rate has not yet succeeded in lifting GDP growth back to trend, or inflation back to target.
The main contributors to GDP growth last quarter were a big rise in government investment (up nearly 12%q/q), which added a whopping 0.6% points to real GDP growth over the quarter – the oft-promised public infrastructure boost seems to have arrived. A decent rise in household spending added another 0.4% to GDP growth, and government consumption and net exports each added an additional 0.2% points. The latter stemmed from a near-3% rise in exports over the quarter and smaller rise in imports.
The largest drags on real GDP growth came from a plunge in inventories (mainly grain, after a great harvest), which shaved 0.6% points off real GDP growth. Unfortunately, private non-dwelling construction dipped again, subtracting 0.4% points off GDP growth last quarter. The good news here is that the forward-looking survey of firms’ investment intentions, released last week, pointed to long-awaited improvement here.
Productivity dipped last quarter, but after two decent increases in prior quarters. The terms of trade dived 6%q/q, but this followed rises in the previous four quarters. The plunge in commodity prices (largely in response to rising supply) triggered the largest fall in real per capita net disposable income – the best measure of our living standards – in two years. But, this comes after rises in the past five quarters. There was a welcome 0.7%q/q rise in wages and salaries paid to employees, but the household savings rate fell to the lowest ratio since 2008.
In summary, it still can be said that Australia’s economy is not firing on all cylinders, despite today’s improvement. To be fair, the lingering impact of tropical cyclone Debbie, which struck the east coast in late March, damaged GDP growth in Q2, including by suspending coal exports. This temporary weather-related drag will be reversed in the current quarter, another sign that better news on the economy probably lies ahead.