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Business investment makes positive contribution to GDP

Australia’s improving economic growth was given a large kick-along in the September Quarter by previously under-performing business investment. Quarterly GDP was 0.6% and 2.8% for the year-ended September. This was solid performance, but marginally below expectations. Despite the strength of business investment for the quarter – up 1.8% on the prior quarter – some one-off investments like increased non-dwelling construction suggest business investment is by no means out of the doldrums.

The chart below shows Australia’s annualized economic growth, on a quarterly basis, over the last decade. 

fig6

To go straight to the dashboard and take a closer look at the data, click here.

As the first chart shows, with the exception of the March Quarter in 2016, annualized GDP has not been higher for five years. This is instructive because, as the second chart below shows, that higher level of economic growth was delivered in large part by positive business investment. While a positive contribution is very valuable, particularly if that investment flows through to stronger production or other economic activity, there is demonstrable ground to be made up after a period of lack-lustre investment in the Australian economy.

fig7

To go straight to the dashboard and take a closer look at the data, click here.

Softness in GDP performance is a seemingly perpetual story for Australia over the last few years. Despite the recent improvements, there are still storm clouds on the growth horizon. 

The main culprit appears to be domestic consumption expenditure by households, which rose just 0.1% in the September Quarter. We can see in the chart below that year-on-year price rises have had an impact, but there is a longer-term and potentially structural problem underpinning this weak contribution to economic growth.

 

fig8

As the ABC’s Michael Janda commented:

“The problem is that a lack of wage growth is holding back consumer spending, which makes up roughly 60 per cent of the economy.”

Wages growth challenges, reflective of structural changes in the nation’s economic make-up as much as anything else, are not easily addressed. Again, as Janda reported it:

“The biggest shift has been the shift from producing goods to providing services. In 1985-86 goods production made up more than a third of total value added in the economy, by last financial year that was down to just over 20 per cent.”

If we think of it another way, in part, the constraint on economic growth has been the switch towards services industries and away from manufacturing. The former simply has not sustained the wages growth of the latter, at least for the last four to five years.

To some extent, lower interest rates have masked this situation, allowing households to drive their spending up to a point where household indebtedness has reached 200% of income and has become more than just a small concern. And that makes wages increases all the more important, just to pay off household debt, let alone to consume more.

 

 

Posted Date: February 9, 2018

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