Let’s take a look through a lot of news in just two short parts!
Part 1 – GDP surprises again
Real GDP growth recorded a more upbeat than expected result of +0.6 per cent in the fourth quarter, while the third quarter result was revised up to +1.1 per cent meaning that the economy grew by a much better than expected +3.0 per cent in 2015, and the best annual rate of expansion since September 2012.
The results for the past two quarters now imply an unbelievably strong annualised rate of growth of around +3.5 per cent, and show that we are now tantalisingly close to a quarter of a century along from the last recession, at an incredible 98 consecutive quarters.
A fine effort by anyone’s standards!
The challenges are well enough known, with the terms of trade declining by another -3.2 per cent back towards their long term average in the fourth quarter, resulting in a third consecutive decline in real net national disposable income (although the last two quarters have only seen slight declines, taking the year-on-year decline to -1.1 per cent).
Business investment unsurprisingly fell further (-3.1 per cent), driven once again by collapsing engineering construction activity (-12.3 per cent) reflective of the unwinding of the resources boom.
As for the drivers or growth, then? A slightly better than expected result and therefore contribution from inventories (+0.2ppts), a decent contribution from household consumption (+0.4ppts), and government expenditure.
Government expenditure was up by +1.6 per cent for the quarter and +2.8 over the year. Meanwhile, household spending increased by +0.8 per cent in the quarter and +2.9 per cent over the calendar year, which is a surprisingly strong result given soft wages growth.
The extremely weak result for non-dwelling construction is an apposite portrayal of the ongoing mining investment bust!
As you can see in the graphic above, net exports contributed exactly nothing to growth in the fourth quarter.
In terms of which cities and regions are driving the growth, it’s mainly been a Sydney and Melbourne thing in recent years.
State final demand was again sharply negative in Western Australia (-2.3 per cent) and the Northern Territory (-5.6 per cent, I couldn’t even fit this on the chart, without a massive contortion of the y axis!) as these states transition from resources construction to the exports phase (state final demand is a measure which does not capture exports).
Notably, Queensland has already experienced an enormous decline in resources investment of nearly 50 per cent over the past two years, yet managed to move into positive territory on this measure.
Part 2 – Housing and households
Compensation of employees and gross household income has increased steadily in aggregate, as you would expect in a country with strong population growth, but in reality wages growth and disposable income growth has slowed significantly since the end of the mining boom.
How then has household expenditure produced such as solid result? The National Accounts comprise a huge volume of figures and have many moving parts, but the below chart seems to me to be one of the most significant.
Low interest rates have, with a bit of lag, encouraged Australians to start spending again, with the household savings ratio declining sharply from 9.2 per cent in June 2015 to just 7.6 per cent by December, which is the lowest savings ratio since the third quarter of 2008.
And what of the housing market? Dwelling investment has responded as well as could have been expected to low interest rates, growing impressively by +12.1 per cent over the year, although disppointingly major renovations work has barely budged.
Looking forward we can probably expect to enjoy the multiplier effect of the residential construction boom for quite some time to come yet with approvals still tracking at historically high levels. However, at this stage in the cycle it is now doubtful whether expansion in residential dwelling investment can contribute much further to GDP growth for many more quarters.
Finally, total interest payable on dwellings was $55 billion in 2015, which is a remarkably low figure that remains well below the total interest paid by households in 2008, despite the estimated resident population having surged by around 2.5 million persons over that time.
Assuming the figures are complete and accurate, the aggregate of interest paid on dwellings implies a remarkably low average outstanding mortgage rate of only around 4 per cent.
This sounds too low, adding weight to the theory that the use of offset accounts is becoming increasingly popular.
APRA data released this week showed that 42.3 per cent of all outstanding mortgages have an offset facility.
The interest payable figures suggest that mortgage serviceability for existing homeowners has improved dramatically since September 2008, recently reflected in the lowest rate of mortgage delinquencies on record.
This was a much stronger result than had been anticipated, although a +0.9 per cent GDP growth reading will “drop off” next quarter, suggesting that annual growth could be heading back towards around +2.6 per cent in due course, which intuitively feels like a much more realistic rate of growth than +3 per cent.
The stock market went on an absolute tear with the ASX 200 up by a massive +2.5 per cent, before paring back gains a little at the time of writing.
Overall a happy result on the face of it, but spare a thought for those located in mining and resources regions
where the collapse in demand is hitting folk hard.