Spending cuts slow economy
Amid a range of positive economic data on Tuesday that implicitly endorsed the Reserve Bank's decision to leave interest rates on hold, the Bureau of Statistics delivered sombre news from the 20 per cent of the economy that comprises government spending.
Business asked for government to cut spending, and now they're doing it: at both state and federal levels. In the six months to December, real seasonally adjusted government spending - both consumption and investment - has fallen by almost 5 per cent at federal level, and by 2.5 per cent at state and local government level.
Between them, this has taken almost $1 billion a month out of the economy, and roughly 0.75 percentage points off Australia's GDP - a hefty brake on top of the dramatic slowing in non-resource sectors as a result of the high dollar.
At face value, the sharp fall in budget sector spending has been offset by a stunning jump in investment by government business corporations, which shot up 85 per cent in the December quarter. But the Bureau of Statistics implied that most of that was in purchases of a big private sector asset rather than new investment.
Other indicators released on Tuesday were generally positive, although they confirmed the division between rapid growth in Western Australia and stunted growth, or even shrinkage, in south-eastern states. The figures showed:
■ Net exports added 0.6 per cent to growth in the December quarter, almost entirely due to rising export volumes of minerals.
■ Retail sales rebounded by 0.9 per cent in January, after falling for three months in a row.
■ Vehicle sales in the first two months of 2013 have shot up 8 per cent on last year, with the entire growth coming from four-wheel drives. While car sales are down 4 per cent, SUV sales are up 17 per cent, and light commercial 4WDs are up 34 per cent.
■ The Australian Industry Group's index of service sector activity climbed by 3.1 points in February to its highest level since June 2012, although chief executive Innes Willox noted it represents a slowing decline rather than growth.
Frequently Asked Questions about this Article…
Austerity measures have reduced government spending, which makes up about 20% of the economy. Government spending on services fell 0.2% in the December quarter after a 1% fall in September. Over the six months to December, real seasonally adjusted federal spending (consumption and investment) fell almost 5%, and state/local spending fell 2.5%, taking almost $1 billion a month out of the economy and knocking roughly 0.75 percentage points off Australia’s GDP.
The article notes a range of generally positive economic indicators released the same day that implicitly endorsed the Reserve Bank’s decision to leave rates on hold. While government spending has been a drag, other data such as stronger net exports, a rebound in retail sales and rising vehicle sales helped offset some of the weakness, supporting the RBA’s stance.
Investment by government business corporations surged 85% in the December quarter. However, the Bureau of Statistics suggested much of that increase was due to purchases of a large private sector asset rather than fresh capital spending, so it may not reflect a sustained boost in productive public investment.
Net exports added 0.6 percentage points to growth in the December quarter, driven almost entirely by rising export volumes of minerals. That export strength helped partially offset weakness from lower government spending and softer non-resource sectors.
Retail sales rebounded by 0.9% in January after three months of decline, which is a positive sign for consumer-facing businesses. Vehicle sales in the first two months of 2013 rose 8% year‑on‑year, with growth concentrated in SUVs (up 17%) and light commercial 4WDs (up 34%), and car sales down 4%—useful detail for investors tracking autos and related retailers.
Yes. The indicators confirmed a clear split: rapid growth in Western Australia versus stunted growth or even shrinkage in south‑eastern states. Investors with geographically exposed holdings should consider these regional disparities.
The Australian Industry Group’s index of service sector activity rose 3.1 points in February to its highest level since June 2012. However, its chief executive Innes Willox said the move represents a slowing decline rather than a return to strong growth—an important nuance for investors watching services exposure.
Investors should watch ongoing government spending trends (federal and state), Reserve Bank decisions on interest rates, export volumes—especially minerals—retail and vehicle sales data, and whether government business corporation investment reflects real new investment or asset purchases. These indicators together will help show whether the recent drag from austerity is being offset elsewhere in the economy.
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