Today’s Q1 National Accounts, which include 80-odd pages of detailed statistics on the economy, revealed that Australia avoided a contraction in real GDP last quarter, contrary to the bleak forecasts of some market economists. That said, growth in the economy was weak at just 0.3%q/q, although this comes after the stellar 1.1% gain in Q4 last year (which, in turn, followed the shock contraction in GDP in Q3). The nominal indicators of the economy, however, like the terms of trade and national income, revealed much better news - more on that below.
The sobering news was that real GDP growth over the year has slipped to just 1.7%oya, the weakest outcome since Q3 2009. That was the period immediately after the global financial crisis, so the comparison is not flattering, and should raise fresh question marks about the 3% real economic growth forecasts assumed by Treasury in last month’s federal Budget. The Reserve Bank statement yesterday also stuck with the assumption that GDP growth will return to a 3% rate. We shall see.
For now, Australia’s economy clearly is not firing on all cylinders, but at least is still managing to grow, albeit not at a consistent pace. The soft growth rate revealed today for Q1 nevertheless was slightly above the consensus forecast of surveyed economists, which expected growth of only 0.2% over the quarter. A decent sized rump of forecasters had expected a contraction.
The main sources of weakness in the economy last quarter were material falls in dwelling construction (down 4.4%q/q), public investment (-2.7%), private sector investment in machinery and equipment (-3.0%), and exports (-1.6%, the first fall in seven quarters, albeit party due to inclement weather). There also was a 1.6% rise in imports, which is a drag on real GDP growth. Together, these factors shaved a whopping 1.2% points of real GDP growth over the quarter.
More than offsetting these drags, though, was a 0.5% rise in household spending, a lift in public consumption (+1.0%), a large rise in non-dwelling construction by the private sector (+4.4%) and a big lift in inventories. By industry, there were rises in 17 of the 20 categories – the largest gain was in electricity, gas and water; the largest fall was for the farmers. Victoria and South Australia were the best performing states in Q1, each growing 1.4%q/q. State final demand in Western Australia slipped another 0.2%.
Unlike many of the real economy metrics, the nominal price signals in the economy were solid. For example, the terms of trade – the ratio between export and import prices – bounced another 7% over the quarter (after a near-10% rise in Q4), and is up 25% over the last year. This rise in the ToT drove another healthy gain in real per capital disposable income (the fifth in a row), which is a key driver of our living standards. Unfortunately, productivity was flat in Q1, but this follows a decent gain in Q4. The household savings ratio dipped below 5% for the first time since 2008.
In summary, Australia is well into its 26th year without back-to-back declines in real GDP (the standard definition of a technical recession), an impressive record that rivals that of the previous record holder the Netherlands, so we should not be too downbeat. In fact, our positive track record is quite remarkable given the stiff challenges we have faced since the end of the last recession in 1991, including the most recent disruption caused by the twin commodity price and mining investment booms. In the past, Australia typically did not handle prosperity that well, but so far so good on that score.