The slowdown in the economy has been expected for a while and the it’s something the Reserve Bank has been right on top of, as Governor Glenn Stevens said last month, “Data for the June quarter suggest a ‘payback’ of lower exports, and also a period of more subdued consumer demand. There are relatively few readings for the September quarter as yet, though at least some suggest that there may have been a reasonable start to the quarter."
So the economy grew 0.5% seasonally adjusted, less than half of the March quarter’s strong 1.1% result and the weakest quarter since March last year. And there’s every chance the economy will start accelerating at the end of 2014.
The result was actually better than many analysts had expected. Annualising the first two quarters growth, we get a solid rate of 3.2%.
And there were distinct signs that the so-called rebalancing of the economy away form the mining investment boom towards wider domestic activity is working, with contributions to growth from home building, household consumption, manufacturing and parts of the service sector, such as accommodation and food services.
Results from companies such as Harvey Norman, Fletcher Building, GWA, Mirvac, Stockland and Boral are testimony to the positive influence the home building boom is having.
The result for the 2013-14 financial year was 3.1%, just a touch below the 3.2% average for the past 20 years but significantly faster than the revised (downwards from 2.6%) 2.3% for the 2012-13 financial year, and the 2.8% annual growth for calendar 2013.
The impact of net exports in the March quarter of a contribution to growth of 1.4% was cut to 1.2% in the latest figures, but that still outweighed the 0.9% detraction from growth in the June quarter. That was the biggest influence on growth overall, but one that was not a surprise.
We saw a strong rise in stocks (inventories) of 0.9% which offset the first quarter when a rundown in stocks trimmed growth by 0.6%.
Much of the stock rebuilding occurred in mining and manufacturing, plus wholesaling.
Imports rose 3.7% and much of that went into rebuilding stocks in manufacturers and wholesaling.
Usually increases in business stocks means a slowdown in demand and a weaker future growth, but in Australia in the past few years, stock rebuilding has been increasingly tied to what is happening in mining, especially among the high volume exporters of iron ore and coal.
The AMP’s chief economist Dr Shane Oliver said the June quarter GDP was "actually not a bad outcome”.
"It’s not the contraction that had been feared as a fall in equipment investment led by mining and a 0.9 percentage point detraction from growth from trade was more than offset by modest growth in consumer spending, continued strength in housing construction and a 0.9% contribution to growth from inventories.
" The slowdown in growth was heavily affected by timing issues with exports and imports that saw trade unexpectedly boost growth by 1.4 percentage points in the March quarter only to detract 0.9 percentage points in the June quarter.
"This also affected inventories. Given this it makes sense to average the two quarters which gives GDP growth of 0.8% quarter on quarter or 3.2% annualised, which is actually pretty good given the circumstances.
"While the terms of trade are continuing to slide as expected its noteworthy that productivity growth is running at a solid 3.2% year on year in the market sector of the economy resulting in close to zero growth in real non-farm unit labour costs – so no threat to inflation here.
" What’s more, while the household savings rate is trending down a bit, it remains high at 9.4% suggesting households have a good buffer and are continuing to improve their net debt position.
"Finally, the two speed economy is continuing to run in reverse. While state final demand over the last year rose 3.6% in NSW and 2.5% in Victoria it fell by 1.6% in Western Australia and by 1.2% in the Northern Territory,” Mr Oliver wrote yesterday.
The improvement in productivity, lower real unit costs over the year and falling real wages, makes it a bit easier to explain why the June 30 reporting season was better than forecast. In fact productivity now has been improving for the best part of three years.
Much of that is down to the slow growth in the work force (around 0.4% over the year) and the faster rise in output.
When economic growth strengthens and starts boosting employment, productivity growth will slow.
It’s a big positive for the economy, but has been ignored by the ‘work choices again’ mob in business, politics and the media.
And finally one other interesting thing from the GDP data: the savings ratio dipped to 9.4% (both seasonally adjusted and trend) from 9.7% in the three months to March.
That’s a further sign people are chewing into savings to consume, with the booming housing sector the main area of activity.
A year ago the savings ratio was 10.8%, seasonally adjusted, and 120.4% on a trend basis.
Clearly Australians have started using up their nest eggs built from the GFC onwards. But as Dr Oliver says, there’s still enough there to provide a comfortable buffer.
But the rundown also confirms the sharp slowdown in deposit growth in the banks and the increase in offshore borrowing.
That’s a small negative as much of this extra borrowing is being done to finance the booming housing sector, especially in Sydney and Melbourne.
And Paul Bloxham, former RBA official, now chief economist at HSBC said yesterday an increase in household consumption and housing investment were positive factors and suggested growth was solid and the economy was rebalancing following the mining boom.
"We remain of the view that the RBA’s easing phase is done and expect that the next [rate] increase is likely to arrive in the second quarter of 2015,” he said.
