Today's National Accounts show that economic growth was solid in the March quarter. In the context of a slowing world economy, this is reassuring news.
While there are signs of a slowing in domestic demand, the data show that inflationary pressures still remain acute. This emphasises the importance of tackling inflation and building a strong economy, which the Rudd Government has made one of its key priorities.
The National Accounts show that GDP increased by 0.6 per cent in the March quarter to be 3.6 per cent higher through the year. The non-farm economy grew by 0.7 per cent in the quarter, while farm GDP fell by 2.5 per cent. Domestic final demand growth moderated in the quarter, rising by 0.9 per cent and 4.8 per cent through the year, down from 5.5 per cent through the year to the December quarter 2007.
Household consumption growth slowed to 0.7 per cent in the quarter and 4.3 per cent through the year, reflecting the impact of higher interest rates on household budgets. While household consumption remained the main contributor to growth in the March quarter, this represents a significant slowing from the very strong rate of growth recorded in the December quarter. Consumption growth has been supported by strong growth in household incomes, reflecting growth in both employment and wages.
High interest rates are also being felt in the housing sector. Dwelling investment was flat in the March quarter, with a small rise of 0.5 per cent in new and used dwellings being offset by an equivalent fall in alterations and additions. Through the year, total dwelling investment is down 0.7 per cent, due to weakness in new and used dwelling investment.
In contrast, new business investment grew by a solid 1.6 per cent in the March quarter to be 6.6 per cent higher through the year. A strong rise in engineering construction, and more moderate rise in building construction, was partially offset by a fall in machinery and equipment investment. As a share of the nominal economy, business investment remains at around its highest level since the early 1970s.
Net exports detracted 0.7 percentage points from GDP growth in the March quarter reflecting ongoing weakness in export volumes and strength in imports. Export volumes rose by 0.5 per cent in the quarter, and are 2.7 per cent higher through the year. There was some improvement in rural exports in the quarter, although volumes remain lower than at the same time last year due to the ongoing effect of the drought. Import volumes grew by a robust 3.5 per cent in the quarter, primarily reflecting solid growth in capital goods imports. Import volumes have grown by 11.5 per cent over the past year.
The terms of trade rose by 1.1 per cent in the March quarter, to be around record high levels. As noted in the Budget, strong growth in emerging economies is expected to lead to further growth in Australia's terms of trade, underpinned by large rises in iron ore and coal prices. The terms of trade are expected to grow by more than 20 per cent over calendar year 2008.
Inflation remains a major challenge, with the household consumption chain price index showing a marked acceleration in the March quarter in both quarterly and through the year terms. The index increased by a strong 1.2 per cent in the quarter, to be 3.3 per cent higher through the year. The Consumer Price Index increased by 1.3 per cent in the March quarter to be 4.2 per cent higher through the year. The Reserve Bank's underlying inflation measures increased by an average of 4.2 per cent through the year.
Wages data from the National Accounts show that growth remains solid but is not accelerating. Average non-farm compensation per employee grew by 0.4 per cent in the March quarter to be 4.0 per cent higher through the year.
Today's National Accounts show that weaker world growth and higher interest rates are having some impact on our economy, but inflationary pressures remain a challenge.
The Rudd Government is playing its part through the Budget, which makes savings, delivers a strong surplus, and reprioritises Government expenditure to invest in infrastructure, education and skills and health. This will help to put downward pressure on inflation and lay the foundation for a modern economy that delivers sustainable growth into the future.