Australia’s economic growth for the year-ended March 2016 rose to 3.1%, surprising many, but underscoring that some of the key features of the Australian economy have not changed significantly in recent years. The detailed data and analysis was immediately trawled over, with the findings being less glamorous than the headline suggested.
As the chart below demonstrates, year-end gross domestic product (GDP) has trended upwards over the last four quarters and has returned to levels not seen since the September Quarter of 2012. Compared with the year-ended March 2015, annual GDP was 0.9% higher by the end of March 2016. So, not only is the economy continuing to expand, it has been doing so at a faster pace over the last year.
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On the face of it, expanding GDP is very welcome news for Australia, suggesting that there is growth in activity across the economy and implying that business conditions and household incomes and living standards ought be on the rise.
But analysis of the details quickly presents an alternative picture. In this instance, it is a picture in which the majority of growth is concentrated in a small number of areas, with some key elements of the economy making either very little contribution or even detracting from growth. The table below shows the contributions to Australia’s GDP of the major activities.
| YE March 2015 | YE March 2016 | % Change | |
| Consumption Expenditure | 1.50 | 1.60 | 0.10 |
| New Dwellings | 0.40 | 0.40 | – |
| Alterations & Additions | 0.10 | 0.10 | – |
| Non-Dwelling Constructions | 0.10 | -0.30 | -0.40 |
| Business Investment | -0.70 | -1.50 | -0.80 |
| Inventory | 0.40 | 0.10 | -0.30 |
| Exports | 1.50 | 1.40 | -0.10 |
| Imports | -0.60 | 0.50 | 1.10 |
| Total | 2.2 | 3.1 | – |
When considered in this item-by-item manner, the contributions to GDP are quite concerning. What they show is an economy whose growth appears less diverse, and less domestic, than it was a year ago. Many in the forestry and wood products sector will recognise the strength of the housing market in their own data, but they might also recognise their own position when it comes to the continued failure of business investment to make a contribution to national GDP.
Continued strength in exports does equate to minerals and energy exports and is reliant upon continued economic growth elsewhere in the world. While a boon for the nation, it remains a concern because its performance is largely beyond the nation’s control.
This continued slide in private new capital expenditure or business investment has caused the greatest concern. It has been trending downwards since the March Quarter of 2012, but appears to have accelerated its decline over the last year. The chart below shows the serious state of decline.
Putting the business investment decline into numbers. In the March quarter of 2016, total business investment was AUD30.72 billion, down 27.0% from its peak just four years earlier.
It is correct, as some, including Greg Jericho at the Guardian, have pointed out with respect to business investment, that: “As ever, the falls are driven by the mining sector. While there was slight increase of AUD50m in capital expenditure in the non-mining sector, in the mining sector such spending was down AUD925m from the December quarter.”
The impact of the change mining led investment can be seen when comparing to non-mining investment. The chart below shows this, with the manufacturing sector excluded or separated from the ‘other industries’.
However, as Jericho demonstrates, the total volume of business investment set out above does not show the full picture. Below, Jericho has based capital expenditure five years back in March 2011, to show the genuinely alarming failure of manufacturing investment and the flatline in investment in other industries.
The March quarter GDP data does show some movements in a positive direction. Even though mining investment fell 6.6%, non-mining sector investment managed a pretty weak 0.3% rise, but at least it’s a turn upwards as the economy continues its transition.
On that transition note, adding some further fuel to the fire, two senior economists from the ANZ Bank (Richard Yetsenga and Toby Roberts) have suggested Australia’s transition to being a more service driven economy is detracting from the traditional measures of GDP.
Yetsenga and Roberts contend that Australia may well reach full employment with the labour-intensive services sectors demanding more and more of the workforce. But they added in an opinion piece in the Australian Financial Review in June that:
“Most service industries are capital ‘light’ in comparison to goods industries, which means financial service providers and investors may have to adapt to a world dominated by industries with lower funding requirements.”
Their key point, with respect to GDP and its contributions is so well made that it is worth just repeating in full:
“We believe these changes to labour and capital allocation are already starting to take effect, and they help explain some of the mixed signals that the Australian economy has been sending recently. For instance, how do we reconcile relatively resilient GDP growth and strong employment numbers on the one hand, with weak investment and falling inflation on the other? The answer may lie in the transition to a growing services economy which requires more skilled labour but less investment.”
So, how’s your economy going?
