The March Quarter National Accounts were released in early June and showed continuous growth in our economy leading to a likely expansion in business investment. Seasonally adjusted, GDP was 0.3% for the quarter and 1.7% annualised. FWPA’s Economics and Statistics Manager, Jim Houghton reviews the economic growth numbers, major contributors and gives his views on how it will likely progress.
The economy has moved into record territory in terms of continuous economic growth, with some headwinds which will need to be managed.
While the quarter reflects positive growth, most of the main contributors to growth were lower than the previous quarter.
Jim Houghton, FWPA’s Economics and Statistics Manager, said: “The big problem continues to be business investment which is still negative although at a lower level than the previous quarter. In the absence of business investment, demand in the economy must come from some combination of government, households or exports. We can see that exports are continuing to grow in line with the expanded production resulting from the mining investment boom. Household consumption although lower is still a significant contributor to growth.”
However, there have been several reports during the period raising concern about the sustainability of household consumption.
“The Bank of International Settlements (BIS) has raised concerns in its 87th Annual Report (pp. 48-49) regarding the level of household debt in Australia which is now at 189% of household income. It is only because of the low interest rate environment that the debt service levels are below the peaks reached prior to the GFC,” Jim said.
The concern is this may make households vulnerable to any upward movement in interest rates. Furthermore, the BIS presents an international analysis indicating that high household debt levels can act as a drag on consumption with a lag of several years.
Specifically, “a 1% point increase in household debt to GDP ratio is associated with growth that is 0.1% point lower in the long run.
“In simple terms the increase in new debt eventually leads to higher debt service obligations which sap future demand.”
The increasing level of debt is also linked to a falling household savings ratio in recent years.
The rate was negative leading into the GFC and then climbed quickly to above 10%. However it has declined rapidly in the past two years and presently sits at 4.7%.
A compounding factor is the anaemic growth in wages. Historically this has been around 53-54% of total factor income. However in the September and December quarters this has declined to 51.5%. By comparison, profit share has jumped up during the same period.
Policy makers are taking notice. The RBA Governor Philip Lowe commented at a recent forum: “Households are gradually coming to grips with slower growth in their real incomes. Growth in wages is unusually low, average hours worked has declined and the nature of employment is changing… Many households are also coming to grips with higher debt levels and, in our largest cities, high housing prices. We need to watch these issues carefully.”
The upside is that business will expand investment as a logical response to increasing profits. This is supported by the NAB business conditions survey. Chief Economist at NAB, Alan Oster, stated the recent survey has the “business sector looking quite upbeat.” In addition, the survey indicated that in May capacity utilisation jumped to 82.4% – the highest level since mid-2008.
Further demand may also arise from government investment in infrastructure which was again foreshadowed in the budget.
