The Australian economy was limping along at the end of 2014, the latest national accounts figures show, as Australia’s “below-trend” growth threatens to plunge even lower. But it’s what lies ahead that’s important.

December quarter national accounts data from the Australian Bureau of Statistics show the economy grew 0.5%, for an overall 2014 growth rate of 2.5%. However, that includes the strong 1.1% March quarter result, before Joe Hockey’s 2014 budget hammered consumer and investment confidence. Since April 2014, the economy has recorded quarterly growth of just 0.5%, 0.4% and today’s 0.5%.

On the positive side, 2014 was still stronger than 2013, which recorded only 2.1% growth. And revisions to the September quarter (0.4% growth compared to 0.3% as originally recorded) and March (back to 1.1% instead of 1.0%) buoyed the full-year performance. And that “income recession” that was briefly fashionable among some commentators disappeared in December with a rise, albeit just 0.2%, in gross domestic income in the December quarter, even though terms of trade fell 1.7%.

According to the ABS, net exports contributed 0.7 percentage points, household final consumption expenditure contributed 0.5 percentage points to GDP growth and dwelling construction 0.1 percentage points, while inventories offset growth by -0.6 percentage points and non-dwelling construction also subtracted 0.1 percentage points (reflecting the end of the mining investment boom).

The 1.7% fall in the terms of trade, in seasonally adjusted terms, against a 3.5% fall in the September quarter, shows the weaker value of the Australian dollar having an impact on the trade account in particular, with the sharp fall in the cost of oil and petrol imports in November and December also playing a part in the improvement. The savings ratio was 9%, down from 9.1% in the previous quarter and still at a high level, despite the housing booms in Sydney and Melbourne.

Do the numbers vindicate the Reserve Bank’s decision to cut interest rates in February? Officially, not really, with the 2.5% annual result exactly in line with the financial year forecast, although at this rate, the economy is on track to undershoot the Mid Year Economic and Fiscal Outlook forecast of 2.5% growth. Our growth was stronger than America’s last year (2.4% — it slowed markedly in the December quarter) and around the rates of Canada (2.6%) and the UK (2.7%). Don’t forget Joe Hockey is pumping $40 billion into the economy via his deficit, as well. Judging by the building approvals data for January, this year has started a bit stronger, especially in the now-dominant new apartments and town house investment.

But clearly the Reserve Bank believes that’s no longer enough and more rate cuts are needed just to keep growth at the below trend levels seen in 2014, before the impact of the massive slide in business investment starts hitting in the next six months. Remember that private investment data from last week showing a drop of 48% from the current financial year’s level of around $152 billion to a projected first estimate for 2015-16 of $109.7 billion. Those first estimates are generally revised upwards as business spending becomes more definite, but with oil and gas projects being curtailed or postponed and mining companies still slashing spending, there’s no reason to think the revisions this time will be significant.

So the RBA believes the economy could take a big hit from a more rapid downturn in investment, especially in 2015-16, meaning undershooting that 2.5% forecast is a real possibility (and MYEFO’s forecast of 3% growth in 2015-16). Hence the rate cut last month and probably another one (at least) in the next couple of months.

Peter Fray

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