Australia’s economy has turned the corner, and consumer spending was a big help

Australia’s economy expanded at the fastest pace in two years in the December quarter, boosted by an improvement in household spending and stronger exports.

The Australian Bureau of Statistics’ national accounts report today said the economy grew by 0.6% in the quarter.

It attributed this to “modest growth […] broadly across the economy […] supported by an increase in exports”.

Annual gross domestic product (GDP) growth for the year to December 2024 was 1.3%.

That’s not especially high in historical terms, but it is as good as we have seen since late 2022.

The long-term average growth for the Australian economy is closer to 2.7%.

It is one of the last pieces of major economic data before the next federal election and will provide some comfort to the Labor government.

The per capita recession is over

A further encouraging sign is that GDP per head of population is no longer shrinking.

It is tiny, rising a mere 0.1%, but at least it is positive.

This follows seven consecutive quarters where the per capita measure declined.

Today’s report ends what some call a “per capita recession”: when the economy grows slower than the population, so in terms of production per person we actually go backwards.

Households spent more – on furniture, appliances, clothing, hotels, cafes and restaurants, health care and electricity.

Consumption grew by 0.4% – which added to economic growth.

Households also saved more – the saving-to-income ratio grew from 3.6% to 3.8%, the highest in nine quarters.

How were households able to save, even while they spent more?

The answer is wages are growing even more strongly.

Employee compensation increased by 2% across the board, in both the public and private sectors.

The compensation figure also reflects a 0.7% increase in hours worked.

Other contributors to positive economic growth in the quarter were government spending and exports of goods and services.

Agriculture was a strong performer (up 7.3%) due to meat exports to the United States and increased grains production following favourable weather conditions.

What GDP doesn’t measure

Nevertheless, GDP does not capture important dimensions of well-being.

It omits things we value such as unpaid work, and the natural environment.

Spending on recovery from a disaster improves GDP; if a disaster never happens the numbers are unaffected.

Australian statistician David Gruen outlined the limitations of GDP in a speech he gave in 2010, while still at Treasury.

Economists and statisticians alike recognise those limitations.

Still, the alternative to GDP growth is a recession: people lose jobs and income, and businesses go broke.

So overall, this latest release is a positive set of numbers for Australia.

Improving outlook

The trajectory for economic growth is looking good.

The December quarter was an improvement on the September quarter’s result of 0.3%, and 0.2% in the June quarter.

That September quarter result turned out, as predicted, to be a turning point.

We now seem to be on a pathway for continuing growth.

The December quarter, remember, came before the Reserve Bank cut interest rates in February.

Falling interest rates will benefit not only mortgage holders but also business borrowers.

Inflation has fallen to a level that gives optimism about possible future interest rate cuts.

Nevertheless, although the rate of inflation is falling, this does not mean prices are coming down.

They are merely rising more slowly than before. The inflation number is also an average.

Some goods or services have higher than average price rises, others lower.

People tend to pay attention to the prices that rise, not those that stay the same or decline.

In short, these numbers may not make too much of a difference to the government’s election prospects.

People will still be worried about the cost of living.

International events beyond our control

If voters pay attention to international politics, they also know our current economic sunshine might not last.

US President Donald Trump has imposed 25% tariffs on Canadian and Mexican imports and doubled the tariff on Chinese imports from 10% to 20%.

The affected countries are talking about retaliation.

Even if the US does not impose tariffs on Australian products (which remains a possibility, but Australian diplomats are lobbying hard to head it off), there is an impact from the US tariffs on China.

We rely on China as our major trading partner.

If its economy slows, so will ours.

China has responded to the threat of tariffs today with a fresh stimulus package.

Even more worrying is if the trade wars spread to other countries.

Protectionism and insularity harm economies.

Spread widely it can lead to a global recession.

Even though the December quarter national accounts show good signs of economic recovery and bode well for the future, international events beyond Australia’s control might yet derail our positive prospects.

Guest author is Stephen Bartos, Professor of Economics, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article here.