SCOREBOARD: Growth spurt

The latest GDP numbers highlight the extraordinary background for the RBA's latest rate cut. Provided the world can avoid another credit crunch, prepare for a strong 2012.

The data:

Australia’s third quarter GDP rose by 1.0 per cent compared to my forecast of 0.6 per cent and the market at 0.8 per cent. This follows an upwardly revised lift of 1.4 per cent in the second quarter (was 1.2 per cent). Annually, GDP is 2.5 per cent higher.

– GDP by expenditure was up 0.7 per cent, by production it rose 0.9 per cent and by income it gained 1.7 per cent.

– Real gross domestic income surged 1.6 per cent in the quarter to be 5.4 per cent higher annually.

– The main detractors to GDP were inventories, which took off 0.8 percentage points from growth, net exports, which took off 0.6 percentage points and public spending, which also took off 0.6 percentage points.

– Excluding inventories and exports, domestic demand was very strong, rising 2.1 per cent quarter-on-quarter, after a 0.6 per cent gain last quarter to be 4.6 per cent higher annually.

– The key drivers of this rise in domestic demand were household consumption ( 1.2 per cent quarter-on-quarter) and business investment ( 12.9 per cent).

– In nominal terms, GDP rose 1.6 per cent quarter-on-quarter and is 6.1 per cent higher annually.

– The household savings ratio rose to 10.1 per cent from 9.1 per cent last quarter.

– The terms of trade rose 2.7 per cent in the third quarter and is 13.2 per cent higher annually.

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What it means:

Coming a day after the RBA cut rates, these numbers are extraordinary and show, as I’ve been arguing for some time, that the economy is certainly not weak. Quite the opposite – in fact consumers haven’t even put their wallets away. Not that you’d know it mind you. It certainly doesn’t ‘feel’ like it given everyone seems intent on talking things down.

Otherwise, domestic demand – what consumers, business and government spend – rose by 2.1 per cent in the quarter, which is the strongest gain in over four years. Private demand was considerably stronger, rising 3.5 per cent in the quarter and 6.7 per cent annually, which is also the strongest gain since March 2007. Business investment was a huge part of that. Recall the broad-based strength in the partial data that we saw – mining investment was exceptionally strong and certainly made up a huge proportion of growth, but it is misleading to suggest it is all mining and revert to the two-speed economy line, which implies mining is strong and everything else is soft. Mining is certainly exceptionally strong, but growth is decent elsewhere as well. So for instance, partial data showed manufacturing investment was strong in the third quarter and it’s interesting to note in these national accounts that manufacturing production was solid, rising 1.9 per cent in the September quarter after a 2.6 per cent increase in the June quarter. A strong rebound is underway in the manufacturing sector which is consistent with other indicators and those investment numbers.

More to the point, we are also seeing solid growth in household spending, and that’s with an increase in the savings ratio. As to what we are buying? Again, for the third quarter in a row, the accounts show another very strong increase in household goods retailing – up 1.5 per cent in the quarter, which annualises to over 6 per cent for the last three quarters. Retail spending itself rose 1.3 per cent in the quarter, while services were up 1.1 per cent. Spending on recreation was also strong – up 1.4 per cent in the quarter and 5.6 per cent annualised over the last three quarters. Note these are discretionary items and that’s pretty much the story being painted. Discretionary spending is strong – spending on hotels and cafes bounced over 3 per cent in the quarter. Otherwise, food sales were solid this quarter as were car sales following the Japanese earthquake-induced slump that we saw in the second quarter.

For policy, today’s numbers obviously didn’t mean much. But, noting how strong growth was in the third quarter, even before the recent rate cuts, we can only assume that prospects for 2012 will be even better. Cutting rates into the strongest private demand in four years is an extraordinary policy choice. People will argue that the outlook is poor though and that’s what policy is targeting. I would suggest instead that the outlook is unknown. We can’t say it's poor; we can’t say it’s good. Everything will depend on whether we have another credit crunch or not. If we can avoid that, the probability is growth will be very strong in 2012.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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