Saturday, March 5, 2016
Whereas economists – both on the official and the market side – were expecting growth in real gross domestic product of 0.4 per cent or less during the December quarter, leading to growth of 2.5 per cent for the year, the Australian Bureau of Statistics came up with figures of 0.6 per cent and (thanks to upward revision of growth in the September quarter) 3.0 per cent for the year.
Why? Because the statisticians found stronger growth in consumer spending – particularly spending on services – than people were expecting, as well as stronger exports of services.
In other words, our domestic economy – indeed, not just our internal economy but the household sector of our economy – is a bigger part of our destiny than many imagine.
It should be a lesson to those who assume that problems in other economies immediately translate to problems in our economy.
Or that problems in financial markets – particularly the sharemarket – immediately translate to problems in the "real" economy inhabited by you and me. That once the bad news starts, all the news is bad.
The lesson holds even though this week's news relates mainly to a period that began five months ago and ended two months ago, whereas the bad news about China and the sharemarket and all the rest came in the new year.
The first conclusion to draw from this week's accounts is that, if we enjoy a long period of exceptionally low interest rates and a significant fall in the value of our dollar, these forms of stimulus will eventually get the economy growing faster.
The second conclusion is that, thanks to the help of low interest rates and a low dollar, the economy's transition from mining-led growth to growth in the rest of the economy is proceeding satisfactorily.
The national accounts showed business investment spending falling by 3.3 per cent in the December quarter and by 10.1 per cent over the year, with most of that explained by the sharp drop-off in mining and natural gas construction.
On the other side of the transition, the first effect of low interest rates was to encourage a surge in the buying and selling of existing houses, leading to a rise in the prices of those houses and the building of a lot of additional houses.
Spending on building new homes and altering existing ones grew by 2.2 per cent in the quarter and by 9.8 per cent over the year.
Consumer spending grew by 0.8 per cent in the quarter (following upwardly revised growth of 0.9 per cent in the September quarter) to show healthy growth of 2.9 per cent over the year.
Explaining this isn't easy. Let's turn to the "household income account" - which means we switch from quoting real (inflation-adjusted) changes to quoting nominal changes.
We know that household income wouldn't have been growing too strongly because, although a lot more people got jobs in the December quarter, wage growth has been very low. Household income grew by just 0.4 per cent in the quarter.
And household disposable income grew by less than 0.1 per cent, mainly because payments of income tax grew by 1.2 per cent in the quarter.
And yet consumer spending grew by a remarkably strong 1.2 per cent during the quarter (that figure's nominal, remember).
How was this possible? It happened not because households "dipped into their savings" as was mistakenly reported, but because they chose to reduce the amount of what they saved from the quarter's disposable income.
According to the accounts, the nation's households reduced their saving during the quarter by $2.9 billion, dropping it to $19.5 billion. This means the net household saving ratio fell from 8.7 per cent of household disposable income to 7.6 per cent.
Remember that the estimate of household saving is calculated as a residual (income minus consumption), so it can be distorted by any errors in the other items in the sum.
It's not hard to believe the rate of saving has fallen, because for the past four years it's been edging down from its post-financial crisis peak of 11.1 per cent at the end of 2011.
Even so, last quarter's drop of more than 1 percentage point seems very big, about double the size of the biggest previous quarterly falls. It may be revised to a smaller drop.
The best explanation for households' falling rate of saving is that people are less worried about their debts and about keeping their jobs, with rapidly rising house prices in most cities leading them to feel wealthier than they were.
The decline in the rate of saving as house prices rise is pretty convincing evidence of a "wealth effect" helping to bolster consumer spending at a time when household income isn't growing strongly.
And the wealth effect coming via house prices helps tie the strength of consumer spending back to the period of low interest rates and its ability to stimulate spending in different ways.
The news of faster growth in production also fits with the already-known strong growth in jobs – particularly in the later part of last year – and modest fall in the rate of unemployment.
It makes the good news we've been getting on the labour market easier to believe because it's now more consistent with the story we've been getting from the national accounts.
Annual real GDP growth of 3 per cent is a fraction higher than the economy's newly re-estimated trend or "potential" growth rate of 2.75 per cent. And this above-trend growth is what's usually required to have the unemployment rate falling – as it has been.
Of course, whether growth stays at or a little above trend this year isn't guaranteed.