National accounts data released this morning by the Australian Bureau of Statistics (ABS) show that economic growth slowed in the December quarter2004, with gross domestic product(GDP) increasing by 0.1percent in the quarter and 1.5percent through the year. Growth in non-farm GDP was stronger at 2.0percent through the year. The major contributor to growth in the December quarter was business investment, while dwelling investment and net exports subtracted from growth.
Domestic final demand has slowed in recent quarters, consistent with a necessary rebalancing of economic growth. This slowing has been led by a decline in housing investment and moderating household consumption. The forecast increase in export growth has occurred more slowly than expected, reflecting a higher exchange rate, long lead times on new investment in the mining industry, and capacity constraints on some ports.
Australia has benefited from a significant increase in its terms of trade— they are currently at their highest level since the September quarter1974— and this is providing a substantial boost to domestic incomes. Reflecting strong rises in the terms of trade, real gross domestic income increased by 0.5percent in the December quarter and 3.5percent through the year, substantially stronger than GDP. Moreover, higher export prices coming into effect in April 2005 should see the terms of trade increase further, consistent with forecasts released yesterday by ABARE for 16 per cent growth in commodity export earnings in 2005-06.
Developments in the farm sector constrained economic growth in the December quarter. The late arrival of spring rains meant that last year’s grain harvest is estimated to have been somewhat smaller than the record set in 2003. As a result, farm GDP fell by 1.8percent in the December quarter to be 13.0percent lower through the year. This subtracted of a percentage point from GDP growth in the year to the December quarter.
The largest contribution to growth came from business investment which increased by 5.8percent in the December quarter and is 10.0percent higher through the year. Strong growth in business investment is consistent with high levels of business confidence and a profit share that remains near record high levels. In the December quarter, the profit share was 26.6percent, only just below the high of 27.0percent reported in the June quarter2004.
Household consumption increased by 0.4percent in the December quarter, while dwelling investment fell by 3.5percent. Following the exceptionally strong rates of growth recorded in these categories in recent years, some slowing in growth is to be expected. Household income growth remains strong, supported by increases in both employment and wages, and this will continue to support household spending over coming quarters.
As indicated in yesterday’s Balance of Payments release, net exports subtracted 0.6of a percentage point from GDP growth in the December quarter. Export growth has been weaker than expected, but the significant amount of investment undertaken in export-oriented sectors in recent years suggests that export growth will strengthen significantly over the next year. The mining sector alone has invested around $26.5billion in additional productive capacity over the past three years. As these projects are brought on line, they will contribute substantially to export growth.
The increase in the terms of trade contributed to a 1.0percent increase in the GDP chain price index in the December quarter and nominal GDP grew by a solid 1.4percent. Domestic inflation remains subdued, with the household consumption chain price index increasing by 0.6percent in the December quarter and 2.1percent through the year.
While GDP growth has slowed by more than expected in recent quarters, economic conditions in Australia remain very strong. The unemployment rate has fallen to a 30-year low of 5.1percent, interest rates and inflation are at very low levels by historical standards and business investment is growing strongly. Increasing business investment will boost the economy’s productive capacity, laying the foundation for sustainable economic growth over the medium term.