The Australian economy continued to grow just below trend in the three months to March, primarily thanks to higher iron ore exports and prices, but the peaking of the mining investment boom appears to be finally having an impact on growth. The Australian Bureau of Statistics revealed this morning that GDP grew 0.6% in the quarter from the December quarter to be 2.5% higher over the year.

In something that will embarrass quite a few analysts (and no doubt some at the Reserve Bank), our terms of trade rose 2.7% in the quarter after a similar fall in the December quarter. For months now every man and his economist have been telling us that our terms of trade were falling (which they were to December) and that national income was falling and tougher times were ahead. They may be, but first you’d like to hear the critics and forecasters explain away the improvement and admit they were wrong (at least for a quarter).

And the savings ratio remains solid at 10.6% as Australian households and companies continue to act prudently and run down debt, with many home owners using the cuts in mortgage rates to repay their debts faster than they have to and others using continuing to save in bank term deposits. That remains a big positive for the economy, despite impacting on consumer confidence and retailing spending.

And real unit labour costs fell in the quarter. The ABS said:

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“The trend Real ULC decreased 0.4% and the trend Non-farm Real ULC decreased 0.4%. The Non-farm measure is generally preferred as it removes some of the fluctuations associated with Agriculture.”

Falling real unit labour costs indicate a lessening in labour costs. Labour productivity was again up, further undermining claims that Australia is in the grip of a productivity crisis; overall, GDP per hours worked increased 0.4% in the quarter, but gross value added per hour worked in the market sector lifted a hefty 0.7%; trend non-farm Real unit labour costs actually decreased 0.4%.

The last two developments are directly contrary to the assertions of The Financial Review, The Australian, the Business Council and the usual collection of pet shop economists that Australian labour costs are a problem for business, as is our supposedly weak productivity. Neither was true in the March quarter.

March quarter growth was the same as the 0.6% growth in the December quarter, but slower than the 3.2% annual growth rate (revised up from 3.1%) because the very strong 1.2% growth seen in the March quarter of 2012 has fallen out.

The figures were lower than market expectations of 0.7% to 0.8% quarter-on-quarter growth from market economists (depending on which survey you looked at). Those forecasts always seemed a bit too high after the 3.3% fall in real government outlays in the quarter and the fact that there was a surge in government spending in the December quarter.

Driving growth in the latest quarter were the 1.0% rise in net exports (0.7% in the December quarter, up from the originally reported 0.6%) and a 0.3% contribution from household final consumption. Public investment (government spending) detracted 0.9%, and falling inventories (mostly miners running down their stocks of minerals) detracted 0.4%. The fall in total gross fixed capital formation also 0.7% off growth.

You have to ask: can the economy again depend on strong export growth in the current quarter, plus the next six months of 2013? Iron ore prices peaked in the March quarter at more than $US148 a tonne and are now around $US116 a tonne, and today’s data hint at the importance of those high prices for iron ore. The ABS reported that the 2.7% improvement in our terms of trade in the quarter “was driven by increases in the price of metal ores and minerals, for which the largest component is iron ore. The seasonally adjusted implicit price deflator for Metal ores and minerals rose 9.5%.”

The slide in global iron ore prices since early April (even if they have steadied in the past two days) makes that problematic. Iron ore prices are down around 20% (the average so far this quarter compared with the average for the March quarter). Volumes are higher and the dollar is around 7% lower, but will that be enough to offset the significant price weakness.

It means it will be tough to see exports driving growth for another quarter. That means another sector or sectors will have step forward for growth to maintained at the current sedate level in the current quarter and the rest of the year.  That’s why the RBA made its surprise May 7 — and why there won’t be another cut for a while, unless there’s a further slowing in some key sectors, such as housing and household consumption.

The growth numbers also disguised substantial variation between the states that illustrated the transitional nature of this current period. State final demand in one-time boom state WA fell by 3.9%, seasonally adjusted, the biggest fall in the country, which came on top of a 0.9% fall in December. State final demand fell 0.3% in South Australia (the third quarterly fall in a row) and Tasmania fell 1.1%. Queensland, in contrast, grew 0.6%; Victoria 0.8% and NSW 0.4%.