Aussie economy expanded at fastest rate in 2 years

Aussie economy expanded at fastest rate in two years

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Australia’s economy advanced at a healthy clip in the December quarter. Real GDP expanded 0.9%q/q (J.P. Morgan 1.1%, consensus 0.9%), three times the (revised) rate of growth in the September quarter. All three measure of GDP – expenditure, production, and income – printed at 0.9%q/q; there have been big discrepancies in recent quarters. With net exports puncturing GDP growth again, all of the growth in the economy came from domestic sources. Indeed, on the expenditure side of the accounts, domestic final demand soared 2.0%q/q, the fastest rate of growth since the March quarter 2007.

The surprise for us was in household spending, which did not rise as much as we had expected. There was a small upward revision to the September quarter outcome, from 0.2% to 0.3%q/q. The revision for 3Q, the bounce in GDP over the final quarter, and beneficial base effects from last year mean the annual rate of growth in the economy accelerated sharply to 2.7%oya, from 0.9% in the year to 3Q. Domestic final demand grew a robust 3.3% over the year. Net exports, though, shaved 0.5% points from annual GDP growth, but this was more than offset by 0.9% positive contribution from inventories.

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Private investment in machinery and equipment led the way in Q4, surging nearly 11%q/q. The majority of this new spending is destined for the booming mining sector. Generous government stimulus programs, though, also played a key role in the acceleration in GDP growth – public investment soared 10%q/q (not annualised) and public consumption grew nearly 2%. Underlying private demand, however, also was healthy – household spending rose 0.7%q/q and dwelling investment rose 1.1% over the quarter.

Export volumes rose a decent 1.7%q/q over the quarter, but this was swamped by a 7.7% surge in imports. The latter, though, clearly is related to the bounce in private investment in plant and equipment, most of which is imported. A large slice of the new public investment also probably sucked in imports. As trade deficits go, one that helps fuel a surge in productive capacity is one of the least virulent possible.

The impressive performance by the domestic economy was despite the RBA pulling the interest rate trigger three times during the December quarter, moves that saw both consumer and business confidence fall. In fact, the economy’s robust rate of expansion last quarter, which far exceeded official expectations when the emergency interest rate settings were put in place, explains why the RBA was the first G20 central bank to tighten monetary policy. The RBA, of course, yesterday raised the cash rate another quarter point to 4%.

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Price pressures in the economy were well-behaved. The price deflator for private final consumption expenditure, for example, grew only 0.6%q/q, slightly less than in the previous quarter. The rise over the year was 2.4%, just below the mid-point of the RBA’s target range The terms of trade soared 2.9%q/q, the second straight quarterly gain, but this follows big falls through mid-2009. Anecdotes from exporters hint that there are much larger gains in export prices ahead.

Economy-wide hours worked rose 1.0% over the quarter, so productivity (measured by GDP per hour worked in the market sector) dropped slightly (-0.2%q/q). This is the first fall in market sector productivity since mid-2008. Of the states, growth in final demand was strongest in Victoria, Western Australia and New South Wales. Growth was weakest in South Australia and Queensland.

Our forecast is that the economy will expand by about 3.0% in CY 2010 and by 3.5% in CY 2011. That is, on average, the economy probably will be growing above trend this year and next. Under-investment in key infrastructure means the economy is very likely to be bumping up against the same capacity constraints that blighted the last period of expansion. Already, there are signs of skill shortages and wage pressure, and there soon will be more strains placed on capacity in product markets too. The likely flow through to inflation means the RBA’s tightening cycle is far from over.

ENDS

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