The March Quarter National Accounts were released in early June and showed continued growth in the economy. GDP seasonally adjusted was 0.3% for the quarter and 1.7% annualised. Here, FWPA’s Economics & Statistics Manager, Jim Houghton, overviews economic growth numbers, the major contributors to it, and how it is likely to play forward.
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Whilst the quarterly result reflects positive growth most of the main contributors to growth were lower than the previous quarter.
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The big problems continue to be business investment which is still negative although at a lower level than the previous quarter. In the absence of business investment logically demand in the economy must come from some combination of government, households or exports. We can see from the data that exports are continuing to grow in line with the expanded production resulting from the mining investment boom. Household consumption although lower is still a significant contributor to growth.
However, there have been several reports during the period raising concern about the sustainability of household consumption. Firstly the Bank of International Settlements (BIS) has raised concerns in its 87th Annual Report about the level of household debt in Australia. This now at 189% of household income. It is only the low interest rate environment keeping the debt service levels below the peaks reached prior to the GFC.
The concern is that this may make households vulnerable to any upward movement in interest rates. Furthermore, the BIS present an international analysis indicating that high household debt levels can act as a drag on consumption with a lag of several years. Specifically, “a 1% point increase in household debt to GDP ratio is associated with growth that is 0.1% point lower in the long run. In simple terms the increase in new debt eventually leads to higher debt service obligations which sap future demand. You can access the full report at page 48-49
https://www.bis.org/publ/arpdf/ar2017e.html
The increasing level of indebtedness is also linked to a falling household savings ratio in recent years.
The rate was negative leading into the GFC and then climbed quickly to above 10%. However it has declined rapidly in the past 2 years and is presently sits at 4.7%.
A compounding factor in all of this is the anaemic growth in wages. Historically this has been around 53-54% of total factor income. However in the Sep and Dec quarters this has declined to 51.5%. By comparison profit share has jumped up during the same period.
This is exercising policy makers thinking. The RBA, Governor Philip Lowe has weighed into this recently commenting at a recent forum on 19 June, 2017:
“We do, though, continue to face some headwinds. Households are gradually coming to grips with slower growth in their real incomes. Growth in wages is unusually low, average hours worked have declined and the nature of employment is changing. So there is a recalibration of expectations going on. Many households are also coming to grips with higher debt levels and, in our largest cities, high housing prices. We need to watch these issues carefully.”
The obvious upside is that business will expand investment as a logical response to increasing profits. This is supported by the NAB business conditions survey. Alan Oster, Chief Economist, NAB indicating the recent survey has the “business sector looking quite upbeat”. In addition the survey indicated that in May capacity utilisation jumped to 82.4% the highest level since mid 2008.
Further demand may also arise from government investment in infrastructure which was again foreshadowed in the budget.
So in conclusion, the economy has moved into record territory in terms of continuous economic growth with some headwinds which need to be managed.
