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GDP at 3.0% as business investment recession confirmed

Australia’s Gross Domestic Product (GDP) was a satisfactory but unremarkable 3.0% in calendar year 2015, growing soundly from the 2.2% recorded for 2014. However, just below the surface, four successive quarters of negative growth in business investment detracted from what could have been stronger results. The suspicion is that economy wide capacity expansion is limited, even though consumption and exports have grown over the last year.

The chart below shows Australia’s GDP growth to the year-ended December 2015 and back to 2009.

fig1

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

Importantly, the chart shows that after a reasonably long period of decline or flat-lining, in total, Australia’s economic growth has risen to what is the middle of the Reserve Bank of Australia’s (RBA) target range. The RBA will be pleased at some levels that its low interest rates policy and modest support for a lower value Australian Dollar is flowing through into improved economic growth rates.

Solid though the 3.0% growth in GDP is, the real story lies in the contributions to growth and the clues that it provides on the state of the Australian economy.

The chart below shows the major contributors to economic growth, on a comparative period basis for year-end December 2014 and 2015.

fig2

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

The major drag on GDP growth, as described above, is business investment, which declined 1.2% over the year-ended December 2015. For the year-ended December 2014, business investment was also negative, but was down just 0.2%. It is clear that a major contributor to the downturn in business investment has been the end of the mining expansion boom, followed by the decline in commodity demand and exports for which constant reinvestment is required.

Obvious though that is, it begs the question, where will future investment to fuel the economic growth on which Australia relies for its living standards come from?

There are no certainties in seeking to answer such questions, but there are some clues provided in the latest GDP data outlined above.

Over the last year, inventory has moved from being a major detractor of GDP growth (-0.5% year-ended December 2014), to a major contributor (+0.5% year-ended December 2015). While inventory build-ups may be the result of a demand downturn, they can also represent increased production to meet expanding demand. It seems the latter is more likely because other drivers of GDP growth are stable or have expanded.

Consumption expenditure’s contribution to GDP growth rose 0.1% to 1.6% year-ended December 2015 and non-dwelling construction (often with long lead times) rose 0.2% over the year. Both could have dragged production and subsequent inventory build-ups to higher levels over 2015.

This view might be further supported by other contribution data, which shows that imports contributed -0.2% for the year, down from a positive 0.5% a year earlier. Domestic capacity appears to have filled the gap.

That sounds like good news for a domestic economy, and in large part, it is. Growth fuelled by domestic economic activity can be self-perpetuating and as an example, is in part what China’s changes of emphasis have been focused on in more recent times.

Returning to the initial theme, what is of concern is that business investment has stalled and is dragging growth down. The failure of the productive economy to invest to grow capacity and improve efficiency is a potential risk for economic growth in coming years. Capacity utilization and building inventories to meet anticipated demand can only go so far. When, as must happen in the absence of investment, demand outstrips capacity and inventory, growth can stall.

With interest rates at historic lows and no signs of them rising significantly any time soon, normal conditions would result in growing business investment. The prudence and conservatism in the economy that is reflected in the business investment story and in the unwillingness of investors to invest seems at odds with the cost of capital, reflected in interest rates at least. 

The poor appetite for even modest risk in business investment in the productive economy seems to be one of the major risks for Australia’s economic growth in coming years.

 

Posted Date: March 22, 2016

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