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National Accounts – June Quarter 2017

The better days ahead for the Australian economy are now beginning to emerge.

In recent weeks and months we have seen evidence of more jobs, more investment, more wages and more exports.

Today’s National Accounts for the June quarter reveal solid and more balanced growth for our economy, confirming the emerging national economic consensus of the better days ahead that I referred to in this year’s Budget.

Real growth in our economy grew by 0.8 per cent in the June quarter, more than double the pace of 0.3 per cent in the March quarter.

The growth in the June quarter came despite the impact of Tropical Cyclone Debbie, particularly on coal exports, which I said at the time of the Budget would have an adverse impact on growth in the quarter.

In year average terms, the measure we publish in the Budget, our economy expanded by 1.9 per cent during 2016-17.

This is above our 1¾ per cent forecast in the 2017-18 Budget and highlights the continued resilience of the Australian economy as it moves towards more balanced growth.

Nominal GDP grew, as forecast, by 6.0 per cent in 2016-17, despite the volatility in commodity prices.  

In the two quarters of data that have now been released since the Budget, our forecasts have proved to be close to, or even bettering the mark, like on jobs and unemployment.

Also, the conservative approach we have taken to our assumptions on commodity prices has proven prudent, one of the reasons we have been able to maintain the confidence of ratings agencies.

I anticipate that based on these figures and other indications, we will achieve a better than budgeted final year outcome for the underlying cash balance in the 2016-17 year.

This solid result in today’s National Accounts is not based on a reliance on one or two good stories within the economy, but strength that is more balanced across the board.

Household consumption, new public final demand, net exports and new business investment all supported growth, offsetting declines in inventories and flat dwelling investment.

Household consumption, the largest contributor to growth in the year, increased by 0.7 per cent in the quarter, to be 2.6 per cent higher than a year ago. Food, rent, financial services and furnishing and household items were the major growth items.

There was also a large fall in the consumption of electricity, gas and fuel consumption, down 3.7 per cent, but a positive 1.6 per cent result through the year. It should be noted that the quarterly fall in June came on the back of a very strong increase in the previous quarter which was unseasonably warm.

There was also a fall in electricity supply in the quarter, down 2.8 per cent, the largest fall since March 2003.

New public final demand, across all levels of government, rose 2.1 per cent in the quarter, to be 3.9 per cent higher through the year. This solid growth was largely driven by government investment which was up 8.6 per cent over the year.

This is in line with the Government’s record $75 billion investment in economic infrastructure, two-thirds of which will be provided to the States for spending on their roads, railways, water and other projects.

Today’s result also shows our defence industry plan is delivering for our economy, with defence investment up 26.3 per cent in the quarter. Our defence industry plan is an enormous strategic investment in our capabilities, jobs and growth.

In previous discussion of our National Accounts I have consistently spoken about the need to see a lift in private investment. The Turnbull Government’s national economic plan has been targeted to move the dial on investment.

This is one of the most pleasing components of today’s National Accounts.

New private business investment expanded by 1.1 per cent in the quarter – the third consecutive quarterly increase. At 1.5 per cent higher through the year this is the first positive through the year growth since March 2013 – the end of the mining investment boom.

Strength in new business investment was led by new machinery and equipment – up 3.2 per cent for the quarter and 2.2 per cent through the year.

Last week’s Capital Expenditure Survey showed expectations for non-mining investment in 2017-18 improving strongly to be around 5 per cent higher. Many of these firms are benefiting and gaining confidence from the Government’s increased infrastructure investment.

Net exports contributed 0.3 percentage points to GDP growth, with a 0.6 percentage point contribution from exports.

Capital imports rose almost 25 per cent over the past year – the strongest annual growth since around the peak of the mining investment boom five years ago – further evidence of the improvement in private investment, including the non-mining sector.

Following adverse conditions in the March quarter, exports recovered to grow by 2.7 per cent in the June quarter, despite disruptions to coal exports associated with Tropical Cyclone Debbie. Over the year, exports rose 4.3 per cent, led by an 18.7 per cent increase in rural exports and strength in service exports, which have grown on average by over 7 per cent for the past three years on the back of strong education and tourism exports.

The strength of rural and service exports have been supported by the Government’s trade agenda.

In year average terms, these sectors – agriculture and services – drove growth in the economy in 2016-17, contributing 0.5 percentage points and 1.8 percentage points, respectively. This performance is particularly welcome for many of our regional towns that are starting to see more of the rewards for their hard work.

Dwelling investment expanded by 0.2 per cent in the quarter to be 2.5 per cent lower through the year. However, the level of investment remains high by historical standards and there remains a solid pipeline of dwelling construction.

Inventories for the quarter were down, primarily due to grain stockpiles built up from strong harvests being sold down.

The terms of trade fell by 6.0 per cent in the quarter but was still 14.9 per cent higher through the year. This led to nominal GDP declining by 0.1 per cent in the quarter and reflects the volatility seen in commodity prices over the first half of 2017.

Pleasingly, compensation of employees, what is paid out in wages and salaries, rose 0.7 per cent in the quarter and 2.1 per cent through the year. While this is still modest and driven by the large increase in employment – 240,000 jobs in the year, the strongest since before the GFC and 100,000 in the June quarter alone – the improvement we have seen since the start of the year is encouraging.

Improving the incomes of wages and salary earners remains our most important challenge. As the labour market continues to strengthen, wages can be expected to improve.

But there must also be a sustained improvement in profits and productivity. Profits, or the gross operating surplus fell in the quarter, but remained up 12.7 per cent through the year. However this has followed three years to the end of the September quarter where profits had fallen on average and when financial services and resources sector are removed, they had fallen by close to 2 per cent on average for the previous four years.

But the Government is practically optimistic. Like, Governor Lowe who said last night in another positive presentation about our improving economic outlook that he does not see low wage growth “as a permanent state of affairs … as our economy strengths and the demand for labour picks up, growth in wages will pick up too. The laws of supply and demand still work.”

The challenges facing the Australian economy remain, but so do the opportunities that are ahead.

Today’s National Accounts provide further evidence that the Turnbull Government’s national economic plan is having a positive impact.

We will remain focussed on driving growth through policies based on the economics of opportunity, rather than indulging the cynical politics of envy which would throw a wet blanket on our economy.

The Turnbull Government has the right economic plan and is making the right economic choices to secure the better days ahead – which means more and better paying jobs, guaranteed essential services, downward pressure on rising living costs and ensuring the Government lives within its means.