The annual economic growth rate of 2.1 per cent – while unspectacular – was the highest it has been for two years. It also came shortly after the latest inflation data which showed prices rose 3.5 per cent over the same period.
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While that inflation figure partly reflected temporary factors such as the timing of electricity rebates across the nation, price growth has generally been trending up in the second half of the year.
This information probably won’t alarm the Reserve Bank. How do we know that? Because at its meeting in November, the bank’s economists acknowledged the bank might have misjudged the gap between supply and demand and noted inflation would probably be a bit higher over coming months.
Most likely, the bank will decide there’s no pressing need to shift gears, choosing instead to keep rates on hold again at its final meeting of the year next week.
Although the government is still fuelling economic growth through its spending and investment in things like renewable energy, roads and water infrastructure projects, contributing 0.4 percentage points to growth, private demand (that is: consumption and investment spending by households and businesses) has also continued to grow, adding 0.8 percentage points.
Now that doesn’t mean households are necessarily feeling that much better.
The bulk of the increased spending by households was on essentials such as insurance, food and rent. People also burned through more cash on electricity and gas, partly because of an unusually cold winter, and coughed up more for health because of an especially long and severe flu season.
Meanwhile, spending on discretionary (or “nice to have”) things such as hair treatments and air travel fell – although that was after an especially strong period of spending in the June quarter when customers made the most of end-of-financial year sales.
The household savings ratio – the share of income after tax that people stash away – also climbed from 6 per cent in the June quarter to 6.4 per cent in the September quarter, suggesting customers are still feeling cautious.
And economic growth per person was flat, meaning the expansion of the Australian economy largely came down to population growth.
It’s better news when it comes to investment spending by businesses and households, with growth reaching its highest rate since the March quarter of 2021. While investment in housing increased (largely driven by investors rather than owner-occupiers), the bigger surge was in investment by businesses in things such as machinery and equipment.
That’s good because more (or better) machinery and equipment can help us produce more goods and services and improve our productivity (the ability to do more using the same amount of resources). Both the increase in machinery and equipment, and higher productivity, can lift the economy’s speed limit because they allow us to pump out more goods and services to meet demand.
The bulk of growth in private investment came down to strong investment spending on data centres – key pieces of infrastructure for artificial intelligence and cloud computing – across NSW and Victoria.
While “inventories” don’t usually get much attention when GDP figures are reported, they can also be a contributor to (or most recently, take away from) growth. They are a relatively small part of the formula for GDP, but essentially reflect how much stock businesses hold.
When a firm produces more than it sells, the unsold items are added to its inventory and to the country’s GDP. When it sells more than it produces, the amount it has in its inventories falls, subtracting from economic growth.
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In the September quarter, there was a substantial drop in inventories which wiped 0.5 percentage points off the country’s economic growth. Why? Because a lot of iron ore and liquefied natural gas sites underwent maintenance, meaning mining production fell, while firms – especially coal miners – had to run down their stocks to be able to meet demand for their exports.
Even with strong demand for Australia’s exports, especially Australian beef and citrus fruits, the bigger growth in imports meant that overall, trade – specifically the balance between exports and imports – ended up taking away 0.1 percentage points from economic growth.
The increase in imports was largest for fuel and lubricants, as well as computer equipment, linked to the expansion of data centres. Australians’ appetite for imports was boosted by a stronger Australian dollar which made purchases from overseas cheaper for households and businesses.
So far, Australian trade has managed to escape relatively unscathed from Donald Trump’s tariffs, especially as stimulus in China, our biggest trade partner, has kept the price and demand for iron ore high.
While the Reserve Bank will probably keep an eye on the economy’s speedometer and its foot on the brake by holding interest rates steady (governor Michele Bullock this week told a senate committee that inflation hasn’t yet been brought back to a sustainable level), it will also be factoring in changes such as improvements in the country’s productivity which has hit the strongest rate in more than three years at 0.8 per cent over the year.
What exactly the country’s speed limit may be is up for debate. But if productivity continues to improve – as it often does when investment spending accelerates – the economy might just be able to avoid speed bumps and shift safely towards the fast lane.
Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter. Sign up to receive it every Tuesday evening.