Record economic expansion continues: Craig James

GUEST OBSERVER

The economy grew by 0.3 percent in the March quarter after rising 1.1 percent in the December quarter.

Annual economic growth eased from 2.4 percent to 1.7 percent. The economy has not experienced a recession for more than 25 years. Four years ago Australia passed the Netherlands to secure the title of longest economic expansion by an advanced nation in the modern era. 

Contribution to growth: The biggest contribution to growth came from inventories (+0.4 percentage points) from household consumption (+0.3pp), government consumption and non-residential building (+0.2pp). The biggest drag on growth was from net exports (down 0.7pp), dwelling construction (down 0.3pp) and equipment investment (down 0.1pp).

Income: Real gross national income rose by 1.1 percent in the March quarter to be up 5.2 percent on the year. In nominal terms GDP lifted 2.3 percent in the quarter and rose by 7.7 percent over the year.

Productivity: Gross value added per hours worked in the market sector grew by 0.2 percent in the March quarter after rising 0.9 percent in the December quarter. Annual growth was 2.1 percent.

Industry sectors: Fifteen of the 19 industry sectors expanded in the March quarter. Seven sectors added 0.1 percentage points to growth. Three sectors each reduced growth by 0.1pp. Agriculture, forestry and fishing production fell 5.6 percent in the quarter.

What does it all mean?

The Australian economy has had to contend with a lot of factors in the past year – geopolitics, weather events, the on-going unwinding of the mining construction boom and variable housing markets. So economic growth has trekked a zig-zag path. But importantly the record expansion remains on track. Especially positive is the health of the business sector with business conditions the best in nine years. The hope is that employment and investment will continue to lift, maintaining economic momentum. 

The March quarter growth rate may seem modest at 0.3 percent but this followed the strongest growth in five years. The bottom-line is that the doomsayers will need to find another target. The record expansion continues and the outlook remains positive. Particularly encouraging is the fact that annual income growth is the fastest in six years and productivity growth is still above 2 percent. 

Ahead of today’s data there was much focus on Australia possessing the longest economic expansion of any major economy in the modern era. OECD data shows we actually passed the Netherlands to secure this record four years ago. But the positive focus on the achievement is well deserved. 

The outlook for the economy is encouraging. Strong spending on infrastructure as well as keen demand for our exports will support economic growth. And add into the mix the on-going lift in home building – especially on the east coast. Consumers are drawing down saving to spend but in part this reflects an adjustment to the new ‘normal’ wage growth of 2 percent, rather than 3-4 percent. 

The Reserve Bank is always looking ahead and so must we. The outlook for the economy remains bright.

The Reserve Bank expects the economy to grow near its ‘potential’ rate of 3 percent by the end of 2017. That is our expectation also. We continue to believe that interest rates will remain on hold over the rest of 2017.

Craig James is the chief economist at CommSec.