Good news and for business, it’s the best time for two years, despite all the squeals about costs and nasty unions, reluctant consumers, the warm weather, the internet and whatever other reason they can advance to deny the current reality.
The economy performed strongly in the March quarter and presented business with the best conditions for years, with strong economic growth, solid demand, higher profits, higher labour productivity, low inflation and falling real wages.
And that benefited key industries such as exporters of iron ore coal and other key commodities.
Housing is doing well as is the finance sector (especially the banks, just look at their March half year and quarterly profits) because of the housing boom.
Domestic consumption was OK, even if there was a small dip in spending.
That’s not to say some parts of some sectors are doing it tougher than others – manufacturing is still in the doldrums and drought is starting to encroach on rural industries, especially beef, sheep and grains.
But contrary to the commentaries from the Federal government about the rotten economy, the economy is in better shape as the benefits of our $700 billion investment boom continue to appear on the national balance sheet.
As the Australian Bureau of Statistics yesterday revealed, the economy grew at a seasonally adjusted 1.1% in the three months to March, taking twelve-month growth to 3.5%, just over its trend rate of growth.
That is better than Treasurer Joe Hockey’s December Mid Year Economic and Fiscal Outlook prediction of 2.5% growth for 2013-14 and 2.75% in the budget last month.
The economy will have to hit an enormous pothole in the June quarter to see these lower forecasts met.
GDP beats forecasts
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But the results should flow through to a stronger budget revenue bottom line (and lower than expected deficit) despite the continuing fall in terms of trade which are now back to early 2010 levels because of the drop in iron ore prices in particular and the refusal of the Aussie dollar to fall in value.
The household savings ratio remained steady at 9.7%, still high by the levels a decade ago, but under the level in the wake of the GFC. That means there’s still ample buffers held by consumers in the event of a downturn and a rise in unemployment.
And the good news for business continued with the national accounts confirming that labour productivity is still improving.
GDP per hour worked rose 0.6% for the quarter and 2.1% through the year in trend terms, and performed even better in the market sector, where gross value added per hour worked rose 0.8% in the quarter and 2.4% through the year in trend terms.
Real unit labour costs, which join productivity and wage costs, fell 1.1% in the quarter; in the non-farm sector they fell 1.0%.
Monday’s March quarter business indicators data from the ABS also showed wage costs failing to keep pace with inflation (which remains low), while company profits have risen.
In fact real wage growth is now at 17 year lows and have been for the past nine months.
Business is therefore enjoying a low inflation, low interest rate, trend growth environment with rising productivity and falling real wages, which are key components in any new investment planning.
Consumer spending rose 0.5% and dwelling investment surged a strong 4.7% quarter on quarter as the housing recovery has started to come through.
But consumer spending and housing investment were more than offset by weak business investment, a fall in public sector investment and detraction from inventories to result in Gross National Spending falling by 0.3% quarter on quarter. But leave aside that weak inventories story (which is an accounting valuation) and spending was up 0.3%.
But the GDP result was the strongest since a similar rise in March 2012.
The news saw the Aussie dollar rise to more than 92.80 USc around midday as traders punted on a rate rise coming sooner than expected. That’s not going to happen.
The strong result was because of iron ore boost: but instead of price growth, it’s volume growth – tens of millions of tonnes more of the stuff poured out of the Pilbara mines of BHP Billiton, Rio Tinto and Fortescue especially for China and also for Japan and South Korea.
As anticipated on Tuesday net exports made a 1.4 percentage point contribution to growth in the quarter, and the mining industry made an 0.9 percentage point contribution to the GDP result.
In fact figures just released for the key iron ore port of Port headland showed another record month of iron ore exports in May of just over 36 million tonnes (up from the previous record of 34.8 million). Exports to China hit a new high of 29.9 million tonnes in May, a million tonnes above April’s record.
But the growth was spread across the economy: the housing boom helped boost the contribution from construction and finance industries.
Real gross domestic income rose 0.8% and real net disposable income rose by 1.3% (seasonally adjusted) to be up 2.2% over the year, despite a 1.2% drop in our terms of trade in the quarter and 3.8% over the year.
The savings rate remained steady on a solid 9.7% – lower than the levels a year to 18 months ago, but still high thanks to the higher rates still on offer from the banks and the lingering conservatism of many investors and savers.
But as good and surprising as the March data is, the Reserve Bank still expects the economy to slow later in the year.
Iron ore prices fell sharply in April and May, and it is unlikely the current quarter will see such strong growth as we saw in the three months to March. But it will be enough to produce a solid 12 months of expansion, again.
The RBA expects export volume growth to slow over the rest of the year and the cuts in the Federal and state budgets will again hold back any contribution to growth from the public sector.
The AMP’s chief economist Dr Shane Oliver said in a note yesterday:
"Labour productivity growth over the last year was also a solid 2.2% which when combined with soft wages growth is resulting in weak real unit labour costs which adds to confidence that inflation will remain benign.
"Overall, it’s hard to see the strong March quarter GDP outcome having much if any impact on the RBA’s thinking on interest rates as growth at this pace won’t be sustained. As a result, we continue to see the RBA leaving interest rates on hold for a while yet," Dr Oliver wrote.
This may be as good as it gets for a while – but it’s still a great outcome for the country, especially after so much doom and gloom.
