National Accounts – a strong rebound to end 2016

Australia avoided entering its first recession since the early 1990s, with figures released by the Australian Bureau of Statistics showing the economy expanded by 1.1% in the December quarter. This comes off the back of a 0.5% contraction in the September quarter, bringing yearly GDP growth to 2.4%. 

The strong turnaround indicates many of the factors leading to the September quarter contraction were transient, a view supported in the Reserve Bank’s most recent Statement on Monetary Policy: “Some of the decline can be attributed to disruptions to coal supply and bad weather affecting construction activity. This weakness is not expected to continue…”

Indeed, it didn’t. In fact, many of these factors improved in the December quarter, with growth supported by resource exports, residential construction activity and public spending. 

Consumer spending and exports were the main drivers, each contributing 0.5 percentage points to GDP growth in the December quarter, while public and private investment both added 0.3 percentage points to overall growth. 

In nominal terms, GDP growth this quarter was the fastest since the middle of 2010 (see chart below), with the surging 3.0% quarterly growth largely buoyed by strong commodity prices. That leaves nominal GDP growth over the past year up at 6.1% – a very strong result!

Quarterly nominal and real Australian GDP growth, 2008 to 2016

A key contributor of this lift in the size of the nominal economy came from the terms of trade which rose by 9.1% in the December quarter, to finish the year 15.6% higher than the same time last year. Government revenues look set to benefit from this income boost, though the improvement is also widely seen as temporary, with commodity prices expected to retreat somewhat through the course of 2017.

Despite the recent surge in national income, wage and salary growth remains slow, with growth over the year a modest 1.5%. This soft wage growth is set to continue keeping inflationary pressures low domestically. 

On an industry basis, growth was recorded in 15 of 20 industries, the strongest being in mining, agriculture, and professional services. Each contributed 0.2 percentage points to GDP growth.

Overall, the increases in commodity prices drove much of the improvement in the December quarter. The National Accounts over the second half of 2016 showed a contraction followed by a strong rebound. However, the underlying economic profile was likely a lot steadier than those numbers suggest (readings of the unemployment rate over those six months varied only from 5.6% to 5.8%). The year to December picture of the ‘real’ economy (real GDP growth of 2.4%) matches the modest general economic performance observed across other indicators, while the boost to nominal incomes driven by commodity prices has the hallmarks of a short-term windfall. 

David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.

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