Chief economist update: Australia cruising at low altitude

Toto, we're still in Kansas!

The Australian Bureau of Statistics' (ABS) National Accounts report showed the economy grew by 2.4% in the year to the December quarter - a tad slower than the 2.5% annual growth rate recorded in the same quarter of last year.

This helps explain the RBA's inaction over monetary policy over the course of 2017 and the change in expectations from two rate hikes this year to nil.

To be sure, these are dated stats but they do underline that economic growth has been trending at around 2.5% over the past few years.

As Financial Standard's recently-published Good Economics Guide explains, total economic output is derived from the sum of consumption (C), investment (I), government spending (G) and exports minus imports (X-Y).

The details of the December quarter show positive contributions to growth from household consumption (+0.6 pps) and government spending - government consumption (+0.3) and public investment (+0.2). Private investment subtracted 0.4 percentage points from fourth quarter growth while net exports provided a negative contribution of 0.5 pps (-0.4 pps from exports and -0.1 pps from imports).

C. The strong positive contribution from household consumption is a good thing. The ABS' explained that this is due to increases in health and more specifically discretionary spending - hotels, cafes and restaurants and recreation and culture. This could be interpreted two ways: households' increased spending on non-essentials indicates greater confidence about their future finances; or, given still sluggish wage growth (up 2.1% in the December quarter) would be "unspent" in the coming quarters. Further, the National Accounts also show that the household saving has risen to 2.7% in the December quarter from 2.5% in the previous three-month period. Now why would more confident households save more?

G. Thank goodness for government spending for had it not been for the 1.7% increase in its consumption and 2.9% in public investment, contributing 0.5 pps to growth - and the statistical discrepancy (+0.2 pps) - the lift in household consumption would have been insufficient to negate the negative contributions from private investment and net exports.

I. Private investment dropped by 2.3% over the December quarter, but this is payback from the unusually strong 5.1% surge in the previous quarter. However, the trend estimate reveals continued moderation in the quarterly growth rate to 0.4% from 0.6% in the September quarter and 1.1% in the June quarter.

X-Y. Exports of goods and services fell by 1.8% while imports increased by 0.5% in the December quarter.

While the increase in imports confirms the strength of domestic demand (and potentially keep Australia out of Trump's protectionist radar, we hope), the drop in exports is worrying especially given the widespread recognition of a synchronised strengthening momentum in the global economy.

All else being equal, the RBA should remain on hold through to end-2018 with the potential for more government spending - read, tax cuts - as government and central bank try to shift economic growth into a higher gear.

If you want to read further, below is a snippet from the Financial Standard Good Economics Guide explaining the implications of the GDP data on investments.


Investors follow the size of the GDP and GDP growth because it indicates if the economy is expanding or contracting thereby helping them gauge future economic and therefore business prospects. For example, stock market investors like to see positive economic growth because a strong and expanding economy translates into higher corporate earnings, corporate profits which leads to increasing stock market prices.

Property investors also like to see positive economic growth because it means individuals and businesses are more likely to purchase houses and investment properties during times of expansion when jobs are more secure and incomes are growing.

Conversely, fixed interest investors generally consider economic expansion as negative for bonds because it can indicate inflation may be going up which might force interest rates to increase. When interest rates go up bond investors can suffer because the interest yields on their bonds may not be high enough to exceed expected inflation and this will lead to their bonds capital value decreasing.

By tracking GDP growth investors will come to understand the economic backdrop that underpins the performance of their portfolio. The Australian Bureau of Statistic's GDP report contains a treasure-trove of information that not only paints an image of the overall economy, but also informs investors about important trends within the bigger macro-economic picture.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: GDPAustraliaPrivate investmentNational AccountsAustralian Bureau of StatisticFinancial StandardGood Economics GuideAustralian Bureau of StatisticsTrump
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