Strong GDP result delivers golden business conditions
The March quarter GDP result has delivered some of the best business conditions for years, and shows the extent to which Joe Hockey deliberately underplayed growth ins his economic forecasts, Bernard Keane and Glenn Dyer write.
The economy performed strongly in the March quarter and presented business with the best conditions for years, with strong economic growth, higher profits, higher labour productivity and lower real wages.
The Australian Bureau of Statistics this morning revealed the economy grew at a seasonally adjusted 1.1% in the three months to March, taking 12-month growth to 3.5%, a little over trend and far beyond both Treasurer Joe Hockey’s December Mid-Year Economic and Fiscal Outlook prediction of 2.5% for 2013-14 and 2.75% in the budget just weeks ago. It will now take a spectacular budget-induced crash in the June quarter to meet Hockey’s deliberately gloomy forecasts. But the results should flow through to a stronger budget bottom line for the Treasurer, despite the continuing fall in terms of trade.
The result is great news for business, with the national accounts confirming that labour productivity continues to improve. GDP per hour worked rose 0.6% and 2.1% through the year in trend terms, and performed even better in the market sector, where gross value added per hour worked rose 0.8% in the quarter and 2.4% through the year in trend terms. Real unit labour costs, which link productivity and wage costs, fell 1.1% in the quarter; in the non-farm sector they fell 1.0%.
Monday’s March quarter business indicators data from the ABS also showed wage costs failing to keep pace with inflation (which remains low), while company profits are up. Business is thus enjoying a low inflation, low interest rate, trend growth environment with falling real wages, rising productivity and falling real wages. The GDP result was the strongest since a similar rise in March 2012. The news caused the Aussie dollar to rise to more than 92.80 US cents around midday as traders punted on a rate rise coming sooner than expected.
The strong result was because of iron ore boost: but instead of price growth, it’s volume growth — tens of millions of tonnes more of the stuff poured out of the Pilbara mines of BHP Billiton, Rio Tinto and Fortescue for China, especially, and also Japan and South Korea. As anticipated yesterday, net exports made a 1.4 percentage point contribution to growth in the quarter, and the mining industry made a 0.9 percentage point contribution to the GDP result.
But the growth was spread across the economy: the housing boom helped boost the contribution from construction and finance industries. Real gross domestic income rose 0.8%, and real net disposable income rose by 1.3% (seasonally adjusted) to be up 2.2% over the year, despite a 1.2% drop in our terms of trade in the quarter and 3.8% over the year. The savings rate remained steady on a solid 9.7% — lower than the levels a year to 18 months ago, but still high thanks to the higher rates still on offer from the banks and the lingering conservatism of many investors and savers.
But don’t worry about the “rate rise looms” stuff: that remains far off in the future given the economy is still expected to slow later in the current quarter and later in the year. Iron ore prices fell sharply in April and May, and it is unlikely the current quarter will bring such strong growth. The RBA expects export volume growth to slow over the rest of the year, and the cuts in the federal and state budgets will again hold back any contribution to growth from the public sector. This may be as good as it gets for a while — but it’s still a great outcome.