Thanks to Australian consumers and mining companies, there was no sign of a recession in the March quarter as the economy grew faster than expected.
The 0.9% rise giving an annual growth rate of 2.3%, down on the 2.4% (revised down from 2.5%) for 2014 and 3.5% in the year to March, 2014.
It was one of the strongest growth rates in the major economies for the first quarter – certainly better than seen in Europe, the UK, Japan and the US.
While Joe Hockey and the government is smiling, it is clear the economy continues to grow at sub-trend levels.
However, it was the strongest quarterly growth in a year.
But it wasn’t as strong as the numbers suggest – nominal GDP, which is a better indicator of wages and personal income growth, expanded by only 0.4% in the March quarter, and was up only 1.2% over the 12 months to March – that tells us why the federal government is facing budget pressures as wages growth slows and tax revenues fall.
The stronger than expected growth is a welcome sign and for the moment rules out another rate cut from the Reserve Bank.
The news saw the dollar leap half a cent to around 78.10 in a matter of minutes after the GDP figures were made public at 11.30 am. The currency then retreated in later trading to well under 78 US cents.
In contrast, the ASX fell, continuing the fall from the open of trade and yesterday’s near 100 point fall on the ASX 200.
The growth, while historical, assumes more importance because of the sense of a sliding economy which gathered pace during the quarter, triggered in part by the Reserve Bank’s surprise rate cut in February, and underlined by the rate cut last month.
Consumers drove much of the growth, along with home buyers and exporters. Consumers drew down their savings sharply in the quarter – the saving ratio falling to 8.3% (seasonally adjusted by the Bureau of Statistics) in the quarter, compared with 9.1% in the December quarter and 9.5% a year ago.
The Bureau of Statistics said net exports contributed 0.5 percentage points to GDP growth in the quarter,thanks to higher volumes of iron ore exported in the quarter.
Household final consumption expenditure and changes in inventories each contributed 0.3 percentage points to GDP growth in the quarter, but the ABS said this was offset by a 0.3 percentage point fall from the slide in mining investment.
The ABS said the industries which drove GDP growth in the March quarter were Mining and Financial and insurance services. Mining contributed 0.3 percentage points (from exports) and Financial and insurance services contributed 0.2 percentage points (from the lending boom for housing, especially to investors).
Business investment fell 3.5% in the quarter, thanks to the expected decline in mining investment, but housing investment rose by a very sold 4.7% in the quarter and 9.2% over the year.
The March quarter saw the Terms of trade fell 2.9% in seasonally adjusted terms, following the 1.6% drop in the December quarter. From the March quarter 2014 to the March quarter 2015 the Terms of trade fell 11.4%.
Unless commodity prices fall further, we could be approaching the bottom of the long fall over the past three years. It all depends on what happens to iron ore prices and the value of the US dollar, which will push higher when US interest rates rise.
Wages growth was weak, but that is helping employment and job creation is a bit stronger than expected because of it.
Productivity was OK in the quarter, lower than in previous quarters as the low age growth stimulated higher than expected jobs growth.
Real unit labour costs fell illustrating the lack of wages pressure and the rising opportunity for business to invest without fear of a wages break out, or inflation.
