This week the Reserve Bank of Australia (RBA) left the cash rate on hold at a record low of 1.50%, where it has been since August 2016. The RBA’s accompanying statement was little changed from previous statements and remained generally upbeat about Australia’s outlook. The RBA expects positive business conditions, business investment and public infrastructure spending to support further growth in activity and jobs through the remainder of 2018 and into 2019.
Confirming the positive, albeit slowing,trends in local business conditions, Ai Group’s monthly business surveys (the Australian PMI, PSI and PCI) showed a strong end to winter,with all three indices indicating expansion in August(released this week). The manufacturing sector in particular has confounded doubters in recent years by lifting employment and production but significant headwinds from energy costs and more recently, drought conditions flowing along supply chains, continue to see input costs rise for manufacturers. The pace of growth across the services and construction sectors eased in August but remained broadly positive.
Also confirming Australia’s solid growth path in 2018, Australia’s real output volumes (real GDP) grew by 0.9% q/q and 3.4% p.a. in the June quarter (Q2) of 2018, according to the ABS National Accounts data released this week.Growth in Q2 was supported by government spending and investment, net exports, housing investment and household consumption, all of which were underpinned by ongoing population growth.This was the strongest annual growth rate in GDP since September 2012and it marked a record27thconsecutive year without a recession.
GDP growth lifts to 3.4% p.a.in Q2 2018, the fastest annual rate since 2012
The ABS National Accounts(released this week) indicate that Australia’s real GDP grew by 0.9% q/q in the June quarter (Q2) of 2018 and 3.4% p.a., up from a revised 3.2% p.a. in Q1 of 2018 (chart 1 and table 1). This was the fastest annual growth rate since Q32012and was largely because of upward revisions to the three previous quarters which added 0.5 percentage points.
On the expenditure(real demand) side of the National Accounts, growth in Q2 was mainly driven by household and government consumption. Household consumption rose 0.7% q/q and 3.0% p.a. in Q2 2018 and accounted for just under half of the growth in Q2. This has a large effect on headline GDP because household consumption accounts for about 60% of GDP (on the expenditure side). Consumption grew across 12 of the 17 consumption categories including: food; recreation & culture; and furnishings and household equipment but fell in the purchase of vehicles, cigarettes and hotels & cafes. It appears that at least some of this consumption was financed by households reducing the amount they are saving with the household saving ratio (the proportion of income saved) falling to 1%, which is the lowest rate since December 2007. Government consumption increased by 1.0% q/q and 5.1% p.a., mainly driven by Commonwealth Government spending in health, aged care and disability services attached to the roll-out of the NDIS (see table 1). State and local government consumption rose 0.4% q/q, while Commonwealth government consumption increased by 2.3% q/q.
Dwelling (residential) investment also contributed to GDP in Q2 but it’s benefits were largely offset by weaker private business investment. Dwelling investment rose by 1.7% q/q and 3.8% p.a. driven by rising investment in new dwellings, particularly in Victoria and South Australia. The recent rise in dwelling investment reflects strong approvals in late 2017 and early 2018 which are now flowing through to commencements. The number of dwellings under construction in Australia reached a record high in early 2018,at about 225,000 new dwellings. Solid rates of population growth are helping to support aggregate growth in household and government consumption as well as housing. On a per capita basis, GDP grew by just0.5% q/q and 1.8% p.a. (see table 1).
In contrast, private business investment detracted from growth in Q2, falling by 0.7% q/q but remaining 9.9% higher over the year.A decrease in spending on engineering construction projects (-0.8% q/q) and machinery and equipment (-1.7% q/q)dragged private business investment down in Q2, partially offset by increases on spending on new buildings (+1.0%) and intellectual property assets(+2.7% q/q). Most positively for future productivity and innovation, intellectual property investment by Australian business is rising again after falling between 2012 and 2016 (see chart 2). Net exports (exports minus imports) made a small contribution to GDP (smaller than in other recent quarters and years) as exports rose faster than imports in Q2.
Output growth spreads across all non-farm industries in first half of 2018
On the production (real output) side of the National Accounts, industry output 1 grew in 17 of the 19 major industries in the quarter and in 18 of the 19 major industries over the year to June. In Q2, industry output fell in manufacturing (-1.5% q/q), unwinding some but not all the strong growth in Q1, and in wholesale trade (-0.2% q/q). Over the year to June,the only industry in which real output contracted was agriculture, which fell by 8.8% p.a.despite a small rise in the June quarter (driven by stronger export volumes and high slaughter rates as farmers destocked in response to the drought) (see chart 3).
Stripping out these contractionary effects from the drought-affected agricultural sector, output from the non-farm economy grew by 3.7% p.a. Across the non-farm industries, construction output rose by a very strong 1.9% q/q and 5.5% p.a. because of new buildings and roads construction, as well as strong investment in public infrastructure. In healthcare and social assistance(Australia’s largest employing industry), outputrose by 1.3% q/q and 7.2% p.a. reflecting new hospitals opening across a number of states and the roll-out of the NDIS. Professional services and public administration also grew strongly in Q2, reflecting the growth in state and Commonwealth Government spending that was apparent on the expenditure side of the National Accounts (see above). Finance and insurance (including superannuation) has been Australia’s single largest sector since 2014. It added a further $39.0bn in Q2, up 2.7% p.a. Construction added $33.5bn and healthcare added $32.6bn in real value-added output.
Manufacturing output and sales recovery in first half of 2018
In the manufacturing sector, output fell by 1.5% q/q in Q2 2018, partially unwinding a very strong quarter of growth in Q1 (+2.3%q/q). Over the year to Q2,manufacturing output grew by 1.9%p.a. to $25.5bn. It now accounts for 5.8% of total industry output. This recovery over the past year has taken manufacturing output volumes back to the same level as in 2014 (just under $26bnin real terms), but it remains well below the all-time peak of $30bnprior to the GFC in 2008.
Both the ABS value-added output data and the Ai Group Australian PMI confirm that this recent recovery in manufacturing output has been especially strong in the food and beverages sector, which now accounts for 28.0% of manufacturing output volumes. Food and beverages output grew by 7.9%p.a. in Q22018 (see table 2). This sector is benefiting from excellent export growth (supported by the lower dollar and growing appetites in key Asian markets) as well as solid sales within Australia.
In other manufacturing sectors, weaker growth rates were evident for real output volumes in chemicals,metals and machinery and equipment over the year to Q22018. These sectors have been more directly affected by the end of automotive assembly in Australia during 2017and by rising energy costs. They are now focussed on other types of transport, engineering equipment, advanced manufacturing and specialist equipment, all of which are growing.
This nascent recovery in manufacturing was also evident in the ABS’ industry sales data (in the ABS Business Indicators publication released this week), which showed that manufacturing nominal sales grew by 0.7% q/q and 6.2% p.a. in Q22018 (see chart 4). Most positively, this represented a real sales volume increase over the year and not just a price rise. In inflation-adjusted terms, manufacturing sale volumes were down by 1.6% q/q in Q2 but are up by 1.7% over the year. This included slightly weaker real sales growth in Q1 but resulted in four consecutive quarters of annual real sales growth, for the first time since the GFC.
National incomes rises in Q2 2018
In per capita terms, real net national disposable income (RNNDI, the ABS’ preferred measure of national living standards) increased by 0.3% q/q to beup 3.7% p.a. over the year to Q2.
At a national aggregate level, Australian income is heavily exposed to the terms of trade (see charts 4 and 5). Before the mining boom, RNNDI per capita closely followed real GDP per capita but since the start of the mining boom this relationship has broken down.
RNNDI per capita is now closely linked to the terms of trade –that is,the prices Australia receives for its exports relative to the prices Australia pays for its imports. This relationship tends to make movements in RNNDI more volatile. Although the terms of trade fell in Q2 (-1.3% q/q), it is still up 2.1% over the year, mainly reflecting stronger export earnings in Q12018 (+3.5% q/q).
Looking at the distribution of national income in Q2, aggregate incomes growth was distributed reasonably evenly across the various ‘sources’ of nominal income in the National Accounts(table1). In nominal terms, national aggregate compensation of employees (that is, total wages and salaries paid to all employees) increased by 0.7% q/q and 4.8% p.a., consistent with strong employment growth over the preceding year. On a per capita basis however, average compensation per employee was up by just 0.1%q/q for all employees in Q2, reflecting relatively weak wages growth over this period.
Wages as a share of total factor income fell slightly to 52.2% in Q2, but it remains higher than the recent low of 51.9% in Q12017 (which was associated with a spike in mining industry profits due to resurgent commodity prices, see charts 7 and 8).
Nominal profits for private non-financial corporations (private sector corporations that are not in the financial sector), lifted 0.7% q/q and 9.7% p.a. in Q2. Asa share of total factor income however, nominal profits for private non-financial corporations fell slightly to 20.1% in Q2 from 20.2% in Q1, reflecting the larger growth in other types of income. Growth in nominal profits is extremely volatile from quarter to quarter, largely due to big swings in commodity prices and exports that affect nominal gross profits in mining (see table 1). Improvements in nominal profits were evident in most but not all non-mining industries included in these data (see chart 8).
Gross operating surplus (pre-tax gross profits) for financial corporations (including banks, insurance and all superannuation funds) rose by 1.4% q/q and 6.2% p.a. in Q2, accounting for 6.6% of total factor income in Q2 2018. The share of nominal national income derived from this category has been rising over a very long period, in line with industry and demographic changes (and particularly the growth of superannuation funds and our ageing population) (Chart 7).
More detail on the timing and source of company profits is provided by the ABS Business Indicators publication. Based on a subset of the industries covered in the National Accounts, these data indicated that total nominal company profits for this group of industries rose by 2.0% q/q and 11.4% p.a. in Q2 2018 (nominal and seasonally adjusted).
As has been the case in many quarters over recent years, the bulk of this increase in nominal profits in Q2 occurred inthe mining sector, which saw its profits riseby4.4% q/q and 21.9% p.a. This increase in mining profits accounted for 80% of the increase in company profits in Q2 and 64% of the increase in company profits over the year to Q2.
Nominal aggregate profits in the non-mining sectors grew by a far more modest 1.5% q/q and 5.1% p.a. in Q2. Results across the non-mining sectors were mixed, with nominal profits falling in information media and telecommunications, finance and insurance services, professional services and other services over the year.
Recovery was evident in the manufacturing sector with nominal profits increasing by 1.8% q/q and 8.3% p.a.,to $8.0bn. Even in nominal terms however, aggregate manufacturing profits are still well below the high point reached just before the GFC in June 2008,of $10.1bn (chart 8).
Broad-based growth across the states
State final demand (SFD, the state equivalent of national ‘domestic final demand’ or total expenditure net of exports) increased in all states and territories except the NT in Q2, both in quarterly and annual terms. Over the year, growth ranged from a low of -8.2 % p.a. in the NT to a high of 5.8%p.a.in the ACT. The NT was negatively affected by a 12.7% q/q decrease in private investment in Q2, which was down by 35% p.a. Private investment in the resource-based states can be especially volatile due to the timing and nature of large ‘lumpy’ mining and related projects.
Across the states in Q2:
- NSWSFD grew by 0.3% q/q and 3.5%p.a., with growth in household consumption partially offset by a fall in government consumption and government and business investment.
- Victoria’s SFD grew by 1.2% q/q and 5.2% p.a. in Q2.All components of demand were up in Q2, with government investment rising by a very strong 5.9% q/q,as large public transport infrastructure projects continue to contribute to growth.
- Queensland’s SFD growth slowed to 0.1% q/q and 3.4% p.a. in Q2 from 1.0% q/q in Q1.Household consumption contributed to growth, but public capital investment fell, while government consumption was flat.
- SA fell rose by 1.3% q/q in Q2 due to the private sector. Household consumption rose 0.4% q/q while private sector investment jumped 9.4% q/q driven by a strong increase in non-dwelling construction. Government investment and consumption partially offset the rise from the private sector.
- WA rose 0.2% q/q in Q1, following a 1.2% q/q fall in Q1. The rise in Q2was driven mainly by government consumption and public investment.
- Tasmania’s growth slowed to 0.6% q/q after rising 2.0% q/q in Q1. Household consumption and government consumption drove growth in Q2 and was partially offset by falls in government and private investment.
