Today's National Accounts show the Australian economy grew solidly in the December quarter, underpinned by a strong rise in exports, a pick-up in machinery and equipment investment and a rebuilding of inventories.
GDP grew 0.7 per cent in the quarter to be 2.7 per cent higher through the year, which is an impressive result against the backdrop of the wild weather that began to take hold towards the end of 2010 and the continued withdrawal of fiscal stimulus.
These numbers illustrate that despite some soft spots, our economy is fundamentally strong with an enviable unemployment rate, a bumper pipeline of investment and a fiscal position amongst the strongest in the developed world.
The heavy rains in the eastern states in December are estimated to have reduced GDP growth by around 0.4 percentage points in the quarter through lower coal and agricultural production.
Of course, the most significant impacts of the natural disasters that hit our nation this summer will be felt in the first quarter of 2011 when GDP growth is likely to be reduced by around a percentage point. While a substantial rebound is likely in the June quarter, the overall effect will be to reduce year-average GDP growth in 2010-11 by around a half of a percentage point.
It is clear from the numbers today that we confront the vast challenges thrown at us by these natural disasters from a position of strength.
A key driver of growth was new machinery and equipment investment, which increased 4.7 per cent in the quarter - the first rise in four quarters - a sign that the unwind of capital spending may now be largely complete following the end of the Small Business and General Business Tax Break.
Following strong growth in the June and September quarters, engineering construction declined slightly in the quarter but remains 12.4 per cent higher over the year. This type of investment is lumpy, but its growth over the past year confirms that the expected surge in engineering construction is now underway. Other non-residential construction and dwelling investment were weak in the quarter, highlighting the mixed conditions facing businesses across the economy.
Inventory rebuilding also contributed to growth in the quarter after having been run down in the previous two quarters. A substantial portion of the build-up was wholesale agricultural stocks, which are likely to find their way into exports in 2011.
Today's results are consistent with the Australian Bureau of Statistics' Private New Capital Expenditure and Expected Expenditure report released last week, which indicates that businesses expect to spend around $129 billion on capital expenditure in 2010-11, an increase of over 16 per cent from the corresponding estimate for 2009-10.
The growth in private sector machinery and equipment investment in the December quarter and the sustained run up in private engineering construction investment over the past year comes at a time when the withdrawal of the fiscal stimulus is detracting from growth. It is estimated that the withdrawal of fiscal stimulus detracted 0.3 percentage points from GDP growth in December quarter.
Household consumption rose by only 0.4 per cent, well down on historical trend growth rates. The household saving ratio remained stable at 9.7 per cent, suggesting families are continuing to take advantage of rising incomes to strengthen their own balance sheet.
Consumers appear to have become more cautious in the past couple of years with the saving rate rising considerably and credit growth slowing. Although this means that consumption may be weaker for a period, stronger household balance sheets will ultimately improve the resilience of the Australian economy and support future spending.
Exports made a strong contribution to the December quarter result, growing by 3 per cent despite the drag on coal exports from the heavy rain. Iron ore export volumes and manufacturing exports rose strongly. Import volumes also rose, led by an increase in capital goods imports.
The terms of trade rose 1.1 per cent in the quarter to be more than 22 per cent higher over the year, their highest level since the 1950s. Commodity price increases have continued to feed through into nominal GDP, which rose by 1.2 per cent in the quarter to be 8.8 per cent higher over the year.
The strength in the nominal economy is being reflected in strong income growth for both businesses and employees. Private corporate gross operating surplus rose only slightly in the quarter, but was up nearly 14 per cent over the year, while gross mixed income rose 3.2 per cent to be up 10 per cent over the year. Compensation of employees, which reflects both increases in employment and wages, rose 1 per cent in the quarter, and 7.6 per cent over the year.
Today's National Accounts provides further confirmation that our fundamentals are strong despite some soft spots in the economy and the impact of natural disasters. Our economy's prospects are bright because we got the big economic decisions right, and we have a positive reform strategy for the future to ensure that we convert this success into lasting gains for the Australian people.
2 March 2011