June quarter Gross Domestic Product (GDP) was up 0.8% on a seasonally adjusted basis, representing a significant improvement on the 0.3% increase recorded in the March quarter 2017. In annualised terms, GDP growth was 1.8%. However, even anemic growth has to be viewed through the structural lens. Future drags – especially the capacity of households to contribute to further growth – are evident and their influence appears to be growing.
At an annualized 1.8%, as the chart below shows, GDP growth remains sluggish, but the 0.8% growth in the June quarter is a moment’s relief for an economy struggling to break free of its structural impediments.
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So, in general terms, this is good news. However as in most things in life it is the detail that is important. This is where the contributions to growth can provide insights.
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+0.5% General government
+1.5% Household consumption
-0.1% Dwelling Construction
-0.2% Business Investment (continues to drag down GDP growth but at a lesser rate)
-0.4% Inventory (means reduced production for the period and decline in GDP)
+0.9% Exports (reflecting the outcomes of the mining boom capacity increase)
-1.3% Imports (increase in imports with lower AUD Exch Rate providing a negative contribution to GDP growth)
From the above, one can see the significance of household consumption in continuing to drive growth on the Australian economy. This becomes complicated as household spending at these levels is not being supported by improvements in household incomes.
This very significant point is evident when comparing wages and profits as a share of total factor income. There has been a significant increase in profits since June 2016, but at the same time, a closely linked decline in wages share.
The worrying trend has eased slightly in the June quarter with Profit share down -0.8% and Wages share up +0.5%.
This wages situation raises the obvious question: where is the money coming from to support continued expansion of household consumption? It is clear that following an improvement in the household savings ratio following the GFC, that this measure of household spending capacity has declined progressively over the past 5 years.
The decline in the household savings ratio means households are collectively taking on more debt, which can be seen in increasing household debt ratios. Household debt to income is now running at a record 190% in Australia. This is among the highest level of developed economies.
Coupled with this, interest payments as a percentage of income were 8.6% in March 2017. This was still lower than the peak in September 2008, when the ratio hit 13.2% (but the result of lower interest rates than were in operation in 2008).
The concern for policy makers is this situation makes householders very sensitive to increases in interest rates. In turn, this caution may curtail future consumption growth, with a flow on impact on economic growth.
That is why, in a sophisticated and integrated economy, business investment and government spending on infrastructure are critical growth channels. The good news is there are signs improvements are underway in these key measures. While the contribution to growth from business investment was still negative (-0.2%), it has been progressively improving as the rebalancing of the economy from the mining investment boom has transferred across to services and manufacturing.
An interpretation of the June quarter survey of Private New Capital Expenditure and Expected Expenditure (ABS Cat. 5625) suggests that business investment might start to be a positive contributor to GDP growth in the near future. The survey generates 2 sets of data with one covering expected Capital Expenditure and the other covering actual Capital Expenditure. The data is then presented as a continuum from Estimate 1 being expectations for the next 12 months through to Estimate 7 being the actual for the past 12 months.
It can be seen from the table below that actual Capital Expenditure for the past 5 financial years has been declining. The positive news in the recent survey reflected in Estimate 3 is that companies surveyed expect to spend 101.8 billion in Capital Expenditure in the current financial year which is 17.6% more than anticipated 3 months ago in Estimate 2.
Source: ABS Cat 5625.0 June Qtr 2017
So in conclusion, the GDP numbers are positive. The concern is household debt and the static wages growth. However as business investment starts to contribute positively to growth and depending on the terms of trade the continued contribution from exports the outlook remains good.
