Today's National Accounts show that strong growth in domestic demand has not been matched by increases in the economy's productive capacity.
Real GDP growth eased to 0.6 per cent in the December quarter and 3.9 per cent through the year. The non-farm economy grew by 4.0 per cent through the year, while farm GDP grew by 1.2 per cent. Domestic final demand grew strongly in the quarter, rising by 1.6 per cent to be 5.7 per cent higher through the year.
Australia is failing to meet its productivity challenge which is critical to sustaining strong growth into the future and easing inflationary pressures. Labour productivity in the market sector fell by 0.3 per cent in the December quarter and is flat over the past year. Annual productivity growth in the market sector has averaged around 1 per cent over the past three years, which is less than half the long-run average.
The main contributor to growth in the December quarter was household consumption, which rose by 1.6 per cent to be 5.0 per cent higher through the year. Consumption growth over the year has been supported by strong growth in household incomes, reflecting growth in both employment and wages.
The effects of high interest rates are being felt in the housing sector. Investment in new and used dwellings fell by 0.1 per cent in the quarter to be 0.1 per cent lower through the year. Overall growth in dwelling investment was 1.6 per cent higher through the year, with strength in alterations and additions offsetting the weakness in new and used dwellings.
New business investment grew by 0.6 per cent in the December quarter and 11.0 per cent through the year. Strength in new machinery and equipment investment in the quarter was partly offset by falls in building and engineering construction. As a share of the nominal economy, business investment remains at around its highest levels since the early 1970s.
Net exports detracted 1.0 percentage points from GDP growth in the December quarter reflecting ongoing weakness in export volumes and strength in imports. Export volumes fell by 0.6 per cent in the quarter, and are 2.6 per cent higher through the year. Import volumes grew by 3.6 per cent in the quarter, and are 10.3 per cent higher through the year. This reflects strong growth in domestic demand and the strength of the Australian dollar, and is further evidence that growth in domestic demand continues to outpace growth in domestic supply.
The terms of trade rose by 0.7 per cent in the December quarter. While there is considerable uncertainty around the medium-term outlook for non-rural commodity prices, recently settled contracts and market expectations for iron ore and coal prices suggest further strong rises in the terms of trade in the period ahead.
High inflation remains a major risk to the economy. The household consumption chain price index increased by 0.4 per cent in the quarter to be 2.6 per cent higher through the year. While growth in the household chain price index was weaker than the CPI, it also showed a pick up in inflation in through-the-year terms.
Average nonfarm compensation per employee grew by 0.1 per cent in the December quarter to be 4.6 per cent higher through the year. This is a highly volatile series and quarterly movements should be interpreted cautiously. The ABS' preferred measure of wages growth, the Wage Price Index, increased by 1.1 per cent in the December quarter to be 4.2 per cent higher through the year.
The Rudd Government will modernise the economy and address inflationary pressures by strengthening the budget position, getting spending back under control and targeting investment towards expanding the productive capacity of the economy. Modernising the economy is especially important in the face of increasing global uncertainty.