Australia’s annual economic growth was 3.1% for the year-ended March, its highest level in two years, and for the March Quarter, growth of 1.0% was the strongest quarter since the December quarter of 2011. The strong rise in growth – up from 2.4% – was welcome news, but continues to come with caveats.
The chart below shows seasonally adjusted gross domestic product growth over the last decade. The blue bars displaying the quarterly growth and the red line the year-end economic growth.
To go straight to the dashboard and take a closer look at the data, click here.
The seasonally adjusted line has moved up over the last year, and on that relatively short-term basis, looks reasonably sound. However, as the ABS data shows, and as several commentators noted, trend growth actually turned down in the March quarter. It fell to 0.7% and on an annualized basis was just 2.8%. markedly lower than the seasonally adjusted data.
We need to turn to the contributions to Australia’s economic growth to get a more complete perspective on the health of the Australian economy. The table below sets out the contributions of key sectors.
| Contribution | YE March 2018 |
| General Government | +0.6% |
| Household Consumption | +1.2% |
| New Dwellings | 0.0% |
| Alterations & Additions | +0.1% |
| Non-Dwelling Construction | -0.2% |
| Business Investment | +0.3% |
| Inventory | -0.4% |
| Exports | +0.9% |
| Imports | -0.9% |
The strength in exports was the big kicker in the March quarter. As ever, this was driven by the somewhat erratic mineral and energy resources sector, whose exports of Liquid Natural Gas and coal were up, thus inflating the figures.
For the building and construction industries, we can see that New Dwelling Construction did not grow in the last year, but expenditure on Alterations & Additions added 0.1% to economic growth for the year. A later item in this edition of Statistics Count addresses Alterations & Additions.
Non-Dwelling Construction continued a long series of ‘outs’ over the course of the year-ended March. We do not often explore this related sector, but perhaps in this instance it is enough to say that investment in the built environment for the productive economy has been languishing as much as business investment over much of the last decade.
However, the data shows Business Investment starting to make a solid contribution to economic growth. Adding 0.3% to GDP in the last year, Business Investment is up, having dragged itself from a particularly sorry state previously, as the chart below demonstrates.
To go straight to the dashboard and take a closer look at the data, click here.
Though the situation is improved, Business Investment is still soft in Australia, and needs to show more quarters of growth before we could genuinely consider it has turned the corner.
These are important factors for the Australian economy, but none is more important than the role of Household Consumption and households in the formation of economic growth in the modern economy.
Over the course of the year-ended March, Household Consumption added 1.2% to economic growth, or something less than 40% of total economic growth. On the face of it, that seems solid enough, but Household Consumption makes up 60% of the total economy. This is a more serious matter when viewed from a quarterly perspective, because as Greg Jericho wrote in The Guardian in early June:
“Household consumption makes up around 60% of our economy, and yet it contributed only 20% of the growth in the first three months of this year.”
We can see this in the chart below.
To go straight to the dashboard and take a closer look at the data, click here.
Jericho makes the very good point that:
“…a major reason that spending was even that good was because households are reducing the amount they are saving. In March, Australia households on average saved just 2.1% of their disposable income – the lowest since 2007. We’re spending as much as we were last year, but we are saving less in order to do so.”
He goes on to say, with absolute certainty, that the reason for slow economic growth is weak wages growth.
Total wages growth over the year-ended March was 5.1% – a strong result and the best for six years. But, the reason for that is because more people are employed, not because wages have increased.
It is very good news that more people have jobs, but from an economic growth perspective, that is a finite opportunity, and the evidence points to the peaking of employment growth some time in late 2017 or early 2018. So over the next year, there will not be significant growth in wages paid as a result of new employees.
Because households spend most of their income, that means the contribution of Household Consumption to economic growth will be under pressure, with the only alternative available being rising hourly or unit wages.
Average wages growth over the last year was just 1.6%, relatively slow in the scheme of things and especially compared with inflation running at 1.9%. That means real wages went backwards over the last year.
Jericho suggests this is linked to the sectors where GDP growth is strongest: mining exports (with low employment levels) and government expenditure on healthcare and the NDIS (with low wages). That may well be part of the picture, but there are other structural changes in the economy having an impact also. The ‘gig’ economy and multiple job workers feed into lower bargaining power and many retail businesses where large numbers are employed are performing badly due to internet shopping for instance.
Australia’s headline economic growth numbers are positive, but the economy is working flat-out keeping itself going right now.
