The economy this month

Economic growth remains strong

The latest National Accounts data has showed that the rate of economic growth in Australia was 1.0% in the 3 months to September and 4.3% over the past year. This represents an increase on the June quarter result, which showed a quarterly rise of 0.7% and an annual growth of 3.7%.

Source: Australian Bureau of Statistics 5206

At least part of the lower than expected CPI result for the March quarter was attributable to unusual or one-off type factors. The largest single influence on the CPI movement over the 3 months was a 19% fall in the price of fruit and vegetables. This was primarily driven by a 73% fall in the price of bananas, which have now returned to normal levels subsequent to the shortage of supply that followed Cyclone Larry in March 2006.

The pick up in growth in the September quarter was largely attributable to stronger consumer spending. Buoyed by ongoing employment growth, Australian households increased their rate of retail spending by 1.2% in the September quarter, compared to just 0.4% in the June quarter.

September’s growth data was not all positive, though. Following a period of strong expansion, spending by businesses on investment items (e.g. computers, plant, machinery etc.) was just 0.2% higher. This stalling of new investment expenditure provides a risk to future expansion capacity. With the economy already facing capacity constraints in various areas, continued business investment is required to enable strong rates of economic growth to continue.

Company profits decline

Despite the ongoing buoyancy of the Australian economy, there was a pull back in the profitability of private sector companies over the September quarter. After averaging a growth rate of 2.8% over the previous 8 quarters, gross company operating profits dropped 2.1% in the 3 months to September.

The major contributors to the fall in profits were the mining sector and the manufacturing sector. Both sectors have been adversely impacted by the stronger Australian dollar, which has forced producers to cut prices in $A terms in order to remain competitive on global markets. Miners have also experienced a decline in the price of some commodities following an extended period of boom.

In contrast the retail sector recorded its sixth consecutive quarter of profit increase. Strong retail spending by Australian consumers, combined with cheaper imports as a result of the stronger $A, have created a favourable trading environment for retailers.