Confirmation yesterday that the economy continues to stagger along in low gear, not going anywhere, except sliding lower as 2015 goes on.
While there was no real change in growth in GDP for the December quarter and 2014 – it was below trend, on market forecasts, perhaps a bit better than many had expected.
But that is clearly not enough to keep unemployment lower over the year, and while it was certainly stronger than 2013, it could mark a peak for the next year to 18 months.
GDP rose a seasonally adjusted 0.5% in the three months to December, to be up 2.5% over the full year – against a 2.1% rise in 2013. But seeing the growth trend in the economy is around 3.25%, the outcome was weak, as most of us know.
In fact growth in the last half of the year was running at just under 2%.
Revisions to the September quarter (now growth of 0.4% compared to 0.3% as originally forecast) and the March quarter (now 1.1% instead of 1%) buoyed the full year performance as export volumes, especially of iron ore and coal, helped the economy make the transition from the resource investment boom, along with the still strong home and apartment building boom.
Solid growth in household spending (the best in a couple of years) also helped.
And there was no sign of the mythical income recession trumpeted by The Australian Financial Review and The Australian in December when real gross domestic income fell 0.4% in the three months to September, after an 0.3% drop in June quarter. The ABS data showed a small, 0.2% rise in this measure in the December quarter, even though the terms of trade fell 1.7%.
In its analysis, the Bureau of Statistics said "net exports contributed 0.7 percentage points to GDP growth, household final consumption expenditure contributed 0.5 percentage points to GDP growth and Total dwelling construction 0.1 percentage points to GDP growth. This was offset by a -0.6 percentage point contribution to GDP growth from Changes in inventories and a -0.1 percentage point contribution from Non-dwelling construction”.
Housing investment rose by 2.5% in the quarter to be a remarkable 8.1% higher than it was a year ago.
Consistent with higher household spending, firms in the services sectors undertook solid investment spending in 2014. The capital expenditure in these areas grew over 10%, its fastest rate in 7 years.
Household consumption grew by a strong 0.9% in the quarter to be 2.8% over the year. This is the strongest outcome for household consumption in almost three years.
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. But the terms of trade fell 10.8% over the year.
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, and despite claims that Australians are using up their savings. The savings ratio has been between 9% and 10% for much of the past three years.
Going on these figures there was no reason for the interest rate cut in February from the RBA – there’s more of the same in terms of sub-trend growth – but we are not alone in that.
Our growth was stronger than America’s last year (2.4%) and around the rates of Canada (2.6%) and the UK (2.7%).
We saw a tiny amount of growth in the December quarter, while the UK, the US and Canada all saw a slowing in their growth rates (the US slowed from an annual 5% in the September quarter to 2.4% in December).
And 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 need to keep growth at the below trend levels seen in 2014 before the impact of the massive slide in business investment starts hitting us in the next six months.
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.
Now 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.
The RBA believes the economy could take a big hit from a more rapid downturn in investment, especially in 2015-16, hence the rate cut last month, another one (at least) in the next couple of months, and why the GDP figures are historical and of little help to what lies ahead. The GDP figures don’t hide the fact that there will be at least one more interest rate cut from the RBA.
