View from the Hill - The Hillross Tactical View September 2007

The Hillross Tactical View

The economy this month

Economic growth accelerates

The rate of economic expansion in Australia has accelerated sharply this year. National Accounts data released for the 3 months to June, showed that the level of national output (Gross Domestic product) increased by 0.9%. This higher-than-expected result followed a particularly strong 1.6% expansion in the June quarter.

Economic growth – (% annual change in GDP)

Source: Australian Bureau of Statistics 5206

A highlight of the recent pattern of economic growth has been the increase in investment expenditure by business. Spending on items such as machinery, buildings and computers rose by 4.6% in the June quarter to bring the annual rate of increase to 13%. The large contribution to economic growth now coming from business investment augurs well for future increased capacity and productivity within the Australian economy.

Moderate wage growth continues

Despite the concern of policy makers that a shortage in the supply of labour will lead to increased wages, there continues to be a lack of evidence of any significant rise in the rate of wage growth. During the June quarter, Australia’s Wage Price Index rose by 1.1% to bring the annual rate of wages growth to 4%. There has been very little movement in the rate of wages growth in recent years. For the past 10 quarters, the annual rate of growth in the Wage Price Index has hovered between 3.8% and 4.1%.

Trade deficit steadies but foreign debt rises

There was a marginal widening in Australia’s Current Account deficit (ie the gap between earnings and receipts from overseas trade and income and service transactions) in the June quarter from $15.5 bn to $16.0 bn. This is the second consecutive quarter in which the deficit has been relatively stable. Compared with the June quarter of last year, however, the deficit has expanded by some 18%.

The ongoing deficit position on the Current Account requires funding via additions to the foreign debt. In the June quarter, the value of the foreign debt rose from $535.2 bn to $544.1 bn. This foreign debt now represents 53.1% of annual Gross Domestic Product. This is the highest ratio on record and a material increase on the 51.8% reached one year ago.