Record economic expansion moves into 20^th year

National accounts

• The current economic expansion began in the September quarter of 1991. The 19^th year of the expansion was completed in the June quarter 2010 and the 20^th year of growth has begun with the Australian economy expanding by 0.2 per cent in the September quarter. While growth was only modest in the latest quarter, arguably Australia is still in the strongest position of any global advanced economy.
• While growth was modest in the quarter, it follows a 1.1 per cent increase in the June quarter. The modest growth in the quarter should be regarded as the pause that refreshes. Annual economic growth now stands at 2.7 per cent – below the Reserve Bank’s estimate of “normal growth” of 3.25 per cent.
• The private and public sectors both contributed to growth in the economy in the quarter. Engineering construction and household spending both added 0.3 percentage points to economic growth. The negative contribtions came from inventories, net exports (exports less imports), spending on dwellings and private spending on equipment.
• Eleven of the 19 industry sectors contracted in the September quarter. The strongest contribution came from agriculture, forestry and fishing (up 18.5 per cent in the quarter and contributing 0.4 percentage points to growth).
• At current prices, GDP grew 1.2 per cent in the quarter and 9.6 per cent over the year, boosted by mining profits. Real gross domestic income rose by 7.8 per cent over the year. Income levels are rising, but consumers and businesses are choosing not to spend. The household saving ratio stands at 10.2 per cent.
• Productivity was disappointing – down 0.1 per cent in the quarter and up 0.5 per cent over the year.
• Inflation was under control – the household price deflator rose 0.5 per cent in the quarter and 2.1 per cent over the year.
• In terms of state final demand, four of the states and territories contracted in the September quarter.
• The Reserve Bank Governor has previously indicated that interest rate settings are on hold until 2011. There is nothing in today’s data that is likely to see him shift from that view. In short, Merry Christmas!

What does it all mean?

• How many countries can claim to have notched up 19 consecutive years of economic growth. You’d be scratching to find any country apart from Australia in this elite club. No doubt there are challenges ahead to maintain the extraordinary run of prosperity, but clearly you would want to be in Australia’s shoes as opposed to any other advanced nation. The challenge will be to expand productive capacity and take on more foreign workers to ensure that the economy doesn’t hit the wall.
• While growth was only modest in the quarter, it follows a 1.1 per cent lift in the June quarter. So on average the growth performance remains positive. Rather the softer result in the September quarter reflects some hesitancy from the private sector to take the baton from the public sector. Provided that the Reserve Bank stays on the interest rate sidelines until well into 2011, businesses and consumers should pick up their spending.
• Across Australia, people have been telling us that the economy is very patchy and this is borne out in the latest economic growth figures. The data is certainly a wake-up call to those focussing unduly on the mining boom and neglecting the other 90 per cent of the economy. We argued that cash rates shouldn’t have been lifted in November and this validates our view.
• At present the economy may not be going anywhere, however the longer term story is sound. On many occasions the Reserve Bank has highlighted the significant boost to the terms of trade and the challenges that it is likely to create in terms of capacity, employment and inflation. However this is more a longer term thematic.
• At present the income boost from higher iron ore and coal prices is not as visible across the economy. The extra dollars coming into the Australian economy is not being spent. Rather consumers and business are holding onto the cash until the economic recovery gains traction. The double digit household savings ratio and weak private sector investment outside the mining sector adds weight to this argument.
• Unfortunately the forward looking data suggests that activity is likely to remain stuck in third gear in the near term. Recent economic data has been patchy at best, and the inherent conservative attitude by consumers and businesses is likely to take time to change. No doubt the uncertainty in terms of the global economic story will also figure in the mix.
• CommSec expects the Australian economy to grow by around 3.25 per cent over the coming year – in other words, “normal” growth is expected.

Important InformationThe summary and attached report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

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