And a big tick to the Reserve Bank for getting economy right, judging by the 4th quarter growth figures yesterday. Remember the RBA changed its monetary policy stance at the February meeting and maintained it this week.
The RBA is sitting and watching what the economy does and how it manages the transition from being driven by mining investment to domestic growth, such as residential building and construction, plus other forms of consumption.
Exports were always expected to play a key role as volumes picked up in the wake of the easing in the pace of resource investment – that’s despite weaker prices. The key has been the small, but growing influence of the weaker Australian dollar.
And on top of that Australian consumers have started running down their high level of savings and turning them into higher consumption.
And for business, there was a solid rise in productivity in the economy of around 1.7% to 1.8% for the year to December, and unit labour costs again fell in the final three months and over the year to December as well as wages growth slowed sharply to multi-year lows.
In fact the real story from the GDP data was that the Australian economy wasn’t the basket case Treasurer Joe Hockey, the rest of the Abbott Government, business groups and some in the media claimed it to be after the gloomy mid year economic outlook released in December.
According to the December quarter GDP data, released yesterday by the Australian Bureau of Statistics, the economy was growing very nicely – a touch under trend admittedly, but stronger than it was in the three months to September.
The ABS said the economy grew 0.8% from the September quarter, stronger than that quarter’s 0.6% growth.
Growth through all of 2013 was a much stronger 2.8% compared to the annual rate of just 2.3% in the September quarter.
Economy kicks higher in December quarter
The 2013 growth rate was much closer to the 3.1% growth seen in calendar 2012 and makes a mockery of the gloom and doom coming from various sections of government, business and the unions.
In fact when Joe Hockey held the news conference on December 17 last year to detail contents of what was a very negative assessment from the economy, the real economy was gathering pace – that’s what successive figures for retail sales, exports, the National Australia Bank’s business surveys and quite a few other measures. Only the jobs data was negative and looking like it would worsen, before it would improve.
And the early data for January suggests that the economy has continued growing, even though the private investment outlook is gloomy (something the Reserve Bank and successive governments have been warning will happen for more than a year now).
So what drove growth in the December quarter ? Well, it was in fact exports, as the current account data on Monday suggested, which contributed 0.6% to growth, but final consumption expenditure at 0.5% was much stronger than many business economists had forecast – that’s down to the surge in retail spending in the closing months of 2013 and the real estate boom.
Detracting from growth was the weak investment and construction work in the quarter – gross capital formation – a measure of investment in the economy – was a negative 0.3%, all of which was not unexpected.
Industries contributing to growth were mining (1.2% because of the rising level of exports), while manufacturing (1.5%), rental, hiring and real estate added a combined 4.2% (not unexpected given the surge in property prices and activity).
Thanks to the weakening dollar, the terms of trade rose 0.6% in the quarter as export volumes rose and import volumes fell. (Again where are the experts who have been claiming that they are plunging? They are easing slowly, although that might quicken a little if the dollar doesn’t fall further in coming months.)
And, interestingly the household savings ratio dipped to a seasonally adjusted 9.7% from more than 10%, a sign that Australians are starting to open their wallets, and starting to use their high level of savings to spend on things such as property.
Looking at productivity, the ABS said GDP per hour worked (in trend terms) rose 0.6% in the December quarter and 1.7% through the year. And the other measure, Market sector Gross value added (GVA) per hour worked (in trend terms), rose 0.6% in the quarter and 1.8% through the year.
Unit labour costs (ULC) are a link between productivity and the cost of labour in producing output. The ABS said that in the December quarter 2013, trend Real ULC fell 0.3% and the trend Non-farm Real ULC fell 0.7% and 1.7% over the year. That’s a real boost to corporate Australia.
The Non-farm measure is generally preferred as it removes some of the fluctuations associated with Agriculture.
The AMP’s Dr Shane Oliver said in a note yesterday that, "Given the flow of poor news lately, the December quarter national accounts are a positive surprise showing GDP growth picking up slightly to 0.8% quarter on quarter from an average around 0.6% a quarter over the previous 18 months.
"More importantly it showed that growth is far from collapsing as other sectors of the economy – notably consumer spending, housing construction and trade – are helping to keep the economy growing despite falling business investment.
"Going forward, while mining investment will fall further: consumer spending is expected to pick up pace as rising wealth levels help encourage households to reduce their savings rate slightly, which remains very high at 9.7%; a 35% surge in building approvals over the last year points to a strong upswing in dwelling investment; and trade is expected to continue to contribute to growth as slowing mining investment results in slowing mining related imports of machinery and equipment and as new resource projects come on stream boosting export volumes.
"The national accounts also showed solid productivity growth of 1.9% year on year and a 1.7% fall in real unit labour costs over the last year. This adds to evidence that the economy may have left behind to some degree the productivity malaise seen over the last few years.
"The fall in real unit labour costs certainly highlights that wages growth and labour costs generally are not a threat to inflation at present. The improved productivity performance is also consistent with the cost out focus of many Australian companies and is of course another driver of the improving profit outlook."
