No change to official interest rates until February 2019: CommSec

No change to official interest rates until February 2019: CommSec
Joel RobinsonDecember 7, 2020
EXPERT OBSERVATION
 
The record economic expansion is well into its 27th year. The Australian economy grew by 1.0 per cent in the March quarter after growing by an upwardly-revised 0.5 per cent (previously 0.4 per cent) in the December quarter – the equal best quarterly growth rate since December 2011. Annual economic growth rose from 2.4 percent to 3.1 per cent – the strongest growth rate in 21 months.
 
The biggest contribution to growth came from net exports (+0.4pp), government consumption (+0.3pp), household consumption (+0.2 pp), dwelling investment (+0.1pp), non-dwelling construction (+0.1pp). Private equipment was flat. The only drag on growth came from public investment (- 0.1pp).
 
Real gross national income rose by 1.7 per cent in the March quarter to be up 2.4 per cent on the year. In nominal terms GDP increased by 2.2 per cent in the quarter and rose by 3.9 per cent over the year.
 
Gross value added per hours worked in the market sector rose by 1.0 per cent in the March quarter, but was down by 0.1 per cent on the year. Hours worked in the market sector fell by 0.2 per cent in the March quarter, but was up by 2.4 per cent on the year.
 
Thirteen of the 19 industry sectors expanded in the March quarter. Strongest growth was by Administration and Support Services (+3.0 per cent), Mining (+2.9 per cent) and Manufacturing (+2.4 per cent). Agriculture, forestry and fishing (-1.7 per cent) and Accommodation and Food Services (-1.3 per cent) recorded the biggest falls in output. Two sectors both added 0.2 percentage points to GDP growth and six sectors each added 0.1 percentage point to GDP growth. Only one sector detracted 0.1 percentage points.
 
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 No change to official interest rates until February 2019: CommSec
 
What does it all mean?
 
The Aussie economy is in rude health. Economic growth rebounded during the March quarter, recording the equal best quarterly growth rate since the December quarter of 2011. Annual growth lifted to 3.1 per cent, the best growth rate in almost two years.
 
We share the Reserve Bank’s view that growth will be stronger this year than last year. The economy is tipped to grow by “a bit above 3 per cent” in 2018 and 2019.
 
Aussie economic activity is being supported by still-firm household consumption, strong government spending on public transport-related and infrastructure projects and a pick-up in LNG exports. Business inventories also lifted during the quarter.
 
Today’s national accounts also highlighted that the drag from the end of the mining construction boom is receding. Growth in exports accounted for half of the quarterly uplift in growth. The mining sector and commodity prices are continuing to recover due to firm demand from China.
 
The Reserve Bank has reiterated that household consumption remains a “key uncertainty” for the economic outlook. While today’s contribution was mildly positive, developments in the housing market, where home prices in Sydney and Melbourne are falling, will need to be monitored closely. And household debt remains elevated.

Overall, we need to see economic growth stay near 3 per cent levels and the unemployment rate below 5 per cent to see sufficient tightening of the labour market to generate upward pay pressures on employers before interest rates can lift.

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No change to official interest rates until February 2019: CommSec 

What do the figures show?

The Aussie economy rose by 1.0 per cent in the March quarter after lifting by an upwardly-revised 0.5 per cent in the December quarter. It was the equal strongest quarterly growth rate since the December quarter of 2011.

The economy grew by 3.1 per cent over the year to March – the strongest annual growth rate in 21 months. Growth has averaged 2.6 per cent over the decade and averaged 2.8 per cent over the last 15 years.

The non-farm economy rose by 1.1 per cent in the March quarter after increasing by 0.6 per cent in the December quarter. Annual growth stands at 3.6 per cent.

Farm GDP fell by 1.9 per cent in the March quarter after declining by 1.8 per cent in the December quarter. Farm GDP fell by 14.9 per cent over the year.

At current prices, GDP rose by 2.2 per cent in the March quarter after 0.9 per cent increase in the December quarter. Annual growth stands at 3.9 per cent. As at March 2018, the Australian economy was valued at $1,815 billion.

The biggest contribution to growth came from net exports (+0.4pp), government consumption (+0.3pp), household consumption (+0.2pp), dwelling investment (+0.1pp), non-dwelling construction (+0.1pp). Private equipment was flat. The only drag on growth came from public investment (-0.1pp).

In terms of domestic price pressures, the household consumption implicit price deflator rose by 0.6 per cent in the March quarter after increasing by 0.6 per cent in the December quarter. Annual growth stands at 1.6 per cent. Real non-farm unit labour costs fell by 1.6 per cent in the March quarter after increasing by 0.5 per cent in the December quarter. Real non-farm unit labour costs rose by 1.1 per cent over the year.

Gross value added per hours worked in the market sector rose by 1.0 per cent in the March quarter, but was down by 0.1 per cent on the year. Hours worked in the market sector fell by 0.2 per cent in the March quarter, but was up by 2.4 per cent on the year.

The only data available is state final demand (more accurate data would include net exports but it is not available for all states and territories). In the March quarter, growth was strongest in Tasmania (up 2.0 per cent), Victoria (up 1.9 per cent), NSW (up 0.7 per cent) and Queensland (up 0.5 per cent). State final demand fell in South Australia (down 0.2 per cent), ACT (down 0.8 per cent), Western Australia (down 1.1 per cent) and in the Northern Territory (down 2.0 per cent).

Consumer spending lifts. Household spending rose by 0.3 per cent in the March quarter to be up 2.9 per cent for the year. Only four of the 17 sectors recorded weaker spending in the quarter. Spending rose most for Electricity, gas and other fuel (up 2.3 per cent) and Communications (up by 1.5 per cent). Spending fell most for Alcoholic beverages (down 2.0 per cent) followed by Hotels, cafes and restaurants (down by 1.8 per cent).

Thirteen of the 19 industry sectors expanded in the March quarter. Strongest growth was by Administration and Support Services (+3.0 per cent), Mining (+2.9 per cent) and Manufacturing (+2.4 per cent). Agriculture, forestry and fishing (-1.7 per cent) and Accommodation and Food Services (-1.3 per cent) recorded the biggest falls in output. Two sectors both added 0.2 percentage points to GDP growth and six sectors each added 0.1 percentage point to GDP growth. Only one sector detracted 0.1 percentage points.

Click here to enlarge.

No change to official interest rates until February 2019: CommSec

Other points:

Profit share rises. In seasonally adjusted terms, the ratio of profits to total factor income rose from 27.0 per cent to 27.8 per cent in the March quarter. The wages share fell from 52.9 per cent to 52.4 per cent.

Household savings ratio falls. The household saving ratio fell from 2.3 per cent in seasonally adjusted terms to 2.1 per cent in the March quarter – the lowest level since December 2007. In trend terms household saving rose from 2.1 per cent to 2.2 per cent.

Imports rose as a share of spending. The imports to sales ratio rose from 0.390 in the December quarter to 0.397 in the March quarter.

The inventory to sales ratio fell from 0.610 per cent to 0.603 per cent in the March quarter.

What is the importance of the economic data?

The quarterly National Income, Expenditure and Product release (national accounts) from the Bureau of Statistics is an assessment of Australia’s economic performance. Detailed estimates are provided on incomes (wages, profits), spending (such as household, dwelling investment and trade (exports and imports) and production. Other data includes household saving and the economic performance of States and Territories. The main use of the national accounts figures is as a historical record of economic performance. The information has little forward-looking value for currency, interest rate or share markets.

What are the implications for interest rates and investors?

Australia’s record-breaking expansion continues. Importantly, economic growth is strengthening. After a below- par level of activity, largely due to weather disruptions to our export sectors in 2017, output rose back above long- term trend levels in early 2018.

The year has begun strongly with the equal best quarterly growth in output for over six years. And the annual growth rate is near the best in two years. The Reserve Bank is tipping annual growth of 3.25 per cent in 2018. We appear to be on track, though its early days.

Productivity continues to be a key focus and is a necessary ingredient to lift sluggish wages growth. And extra workers taken on by business need to start adding to output. Pleasingly, levels of productivity broadly picked-up over the quarter and year, despite remaining below long-term trend levels.

While the business sector is humming along nicely at the moment, complemented by the fiscal expansion from the government’s infrastructure projects, close attention will continue to be paid to the household sector. Home prices are falling for the first time in five years. Victorian and NSW households are still spending. But consumption remains weak in the mining states. Also, Aussies are drawing down on their savings in the face of weak income growth and rising cost of living pressures. But this may be a sign of confidence in the jobs market.

Employee compensation grew by 1.2 per cent in the March quarter, supported by rising company profits, up by 5.2 per cent – a trend that needs to continue in order to see wages lift sufficiently to boost inflation and interest rates. CommSec expects no change to official interest rates until February 2019.

Ryan Felsman is a senior economist at CommSec.

Joel Robinson

Joel Robinson is a property journalist based in Sydney. Joel has been writing about the residential real estate market for the last five years, specializing in market trends and the economics and finance behind buying and selling real estate.

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