The economy has confounded expectations with a significantly stronger performance than expected in the March quarter, with the Australian Bureau of Statistics unveiling 0.9% growth in the quarter, seasonally adjusted, and 2.3% in the year to the end of March.

The result is well above expectations of 0.6-0.7%, though the level of overall growth is still below budget forecasts and still too weak to lift unemployment. But compared to how the economy looked in the wake of last week’s capital expenditure data, it’s an excellent outcome.

The result was driven by mining (0.3% — with net exports contributing 0.5% to the outcome) and finance (0.2%), while construction detracted 0.1% from growth (that’s the collapse in infrastructure spending that’s occurred over the last 15 months). The ABS slightly revised calendar year 2014 growth down to 2.4% from 2.5%, but the March quarter result means that there’s still a chance the economy will reach the 2.5% predicted in the budget for 2014-15. And Australians are continuing to spend, with net household savings down to 8.3%, the lowest level since the financial crisis ended Australians’ big-spending ways.

The result rules out another rate cut from the Reserve Bank in the immediate future, and after the news the dollar leapt half a cent to around 78.10 in a matter of minutes (the ASX fell, continuing the fall from the open of trade and yesterday’s nearly 100-point fall on the ASX 200).

The GDP numbers are historical, but assume more importance because of the sense of a sliding economy that gathered pace during the quarter, triggered in part by the Reserve Bank’s surprise rate cut in February and the follow-up cut last month.

During the March quarter the terms of trade fell 2.9% in seasonally adjusted terms, following the 1.6% drop in the December quarter. From the March quarter 2014 to the March quarter 2015 the terms of trade fell 11.4%. But unless commodity prices fall further, we could be approaching the bottom of the long fall over the past three years — the budget forecasts a 12.25% fall in 2014-15, but only a 8.5% fall in 2015-16. It all depends on what happens to iron ore prices and the value of the US dollar, which will push higher when US interest rates rise.

Wages growth remains weak (average compensation fell 0.5% in the quarter), but that is helping employment and job creation is a bit stronger than expected because of it. Productivity was OK in the quarter, and real unit labour costs fell, illustrating the lack of wages pressure and the rising opportunity for business to invest without fear of a wages break out, or inflation. Even so, at some point that weak growth will hurt the budget bottom line and, unless Australians continue to cut their savings, consumption.

Peter Fray

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