March Quarter GDP at 0.9% Masks the Investment Gap
Australia’s Gross Domestic Product (GDP) growth in March Quarter 2015 was a solid 0.9%, the highest for the prior year, which saw annualised GDP down to just 2.3%. There were few commentators prepared to declare a full return to a confident economy however, with growth remaining sluggish and being held back by falling investment. Declining investment in an economy is a key indicator of confidence, and also of potential future growth.
Compared with March Quarter 2014, quarterly GDP in MQ’15 was 0.1% lower and the annualised figure was the lowest since the December Quarter in 2013. The experience of the last decade is detailed in the following chart.
There is some expectation that June Quarter GDP will be sufficient to see annual GDP grow modestly or remain stable, despite the very low quarterly GDP recorded in the September and December quarters of 2014.
However, any rebound in GDP has to be viewed carefully to ensure there is a proper understanding of the nature and drivers of that growth. Attention is always paid to GDP headline data, but it is, on closer analysis, that we understand the actual economic conditions driving the nation’s economy.
Examination of the data related to the contributions to GDP shows that for the year to March Quarter 2015, the structural factors impacting GDP into the future are continuing to mount. Compared with the year to the end of the March Quarter 2014, the contribution of exports whilst positive at 1.7% was lower than the previous quarter. Imports increased reflecting a negative 0.7% contribution to growth while inventory expanded resulting in a positive contribution to growth of 0.6% up from -0.5% the previous quarter. It is unclear at this stage whether the growth in inventory is due to expanding production to support future sales or a consequence of declining demand for existing production.
Although the contribution of alterations and additions has remained stable at 0.1%, both new dwellings (0.5%) and non-dwelling construction (0.2%) are making a larger contribution to GDP than was the case a year ago. Consumption expenditure (1.5%) has also risen.
So, Australians are buying more, including in respect of property and associated goods and services, as well as imports which detract from local economic growth. But what do we make of the longer-term outlook and investment, in particular?
In total, for the year to the end of March 2015, total private capital formation detracted 0.5% from GDP, and within that, private business investment detracted 0.9% over the same period. Other contributors to private capital formation managed to pull aggregate investment back up to -0.5%.
The concern with declining business investment is that it is a current indicator of business confidence in the future and essentially, a measure of expected rates of return in the future. Falling business investment limits the future growth potential of the economy. Expressing its own concerns in its ‘Bulletin’ in June 2015, the Reserve Bank of Australia (RBA) states that expected rates of return are too high, and as a result, businesses are not investing.
The RBA view is interesting, and there may be elements of truth in it. After all, Australia is a small nation, with a limited population and a mature domestic economy with strengths in only limited areas.
However, overall, it remains difficult to escape the conclusion that confidence in the future outlook for the economy, and therefore for returns, is cruelling a climate that might otherwise be thought to have the right policy settings to encourage investment.
This investment situation is especially concerning because interest rate policy settings and currency movements have both favoured investment for some time, as the next item in this edition outlines.
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