Today's National Accounts provide an important picture of the Australian economy.
The data demonstrate clearly the economic challenges we confront, particularly in relation to capacity constraints and wage pressures, and their consequences for inflation.
Today's data also highlight the importance of the Rudd Government's agenda to expand our productive capacity and modernise the economy by investing in skills and infrastructure.
National Accounts data released by the ABS this morning show that GDP increased strongly by 1.0 per cent in the September quarter to be 4.3 per cent higher through the year. The non-farm economy grew by 4.5 per cent through the year, while farm GDP fell by 6.9 per cent. The ABS expects little recovery in the farm sector from the drought, with farm GDP projected to fall by 0.2 per cent in 2007-08, following a 22.9 per cent fall in 2006-07.
Household consumption was the main contributor to growth in the September quarter. Household consumption rose by 1.2 per cent to be 4.5 per cent higher through the year. Dwelling investment rose by 1.4 per cent in the September quarter to be 4.8 per cent higher through the year.
New business investment grew by 0.5 per cent in the September quarter to be 12.8 per cent higher through the year. Strength in new building construction was partly offset by falls in new machinery and equipment and engineering construction.
The terms of trade fell by 0.8 per cent in the September quarter – the first fall since the December quarter 2001. There is some variability in the outlook for the terms of trade. The prices of some commodities, such as iron ore and coal, are showing signs of strength, while other commodity prices are falling.
Export and import volumes both increased by 2.3 per cent in the September quarter. Export volumes are 4.6 per cent higher through the year, while import volumes are 12.8 per cent higher.
Despite significant business investment, labour productivity remains weak in both seasonally adjusted and trend terms. Labour productivity in the market sector (seasonally adjusted) fell by 0.9 per cent in the September quarter, and was only 0.8 per cent higher through the year – just one-third of the long-run average.
Average nonfarm compensation per employee grew by 1.0 per cent in the September quarter to be 5.9 per cent higher through the year. This is a volatile measure. Growth in the Wage Price Index has also strengthened, although not to the same extent as the National Accounts measure of wages.
The combination of continuing weak productivity growth and strengthening wage growth implies nominal unit labour costs are increasing. This provides further evidence of capacity constraints – such as skilled labour shortages and infrastructure bottlenecks - which require urgent attention following a sustained period of economic growth.
The household consumption chain price index increased by 0.5 per cent in the September quarter to be 2.2 per cent higher through the year, in line with the rise in the Consumer Price Index. However, with the RBA measures of underlying inflation growing at around 3 per cent through the year, higher inflation remains a risk to the economy.
The Rudd Government's economic strategy is focused squarely on expanding the long-term productive capacity of the economy in order to help ease these inflationary pressures and support higher living standards into the future.