Today's National Accounts are a sobering reflection of the extremely difficult global environment in which Australia's economy is operating. Although the Australian economy has held up better than most other economies, the inevitable impact of the global recession is clearly evident in today's data.
GDP contracted by 0.5 per cent in the December quarter to be 0.3 per cent higher through the year. Farm GDP grew strongly, rising by 10.8 per cent, but this was more than offset by a fall in non‑farm GDP.
Against the backdrop of the sharpest synchronised global downturn in generations, Australia has held up better than most other countries. Many countries including the United States, the UK, the Eurozone and Japan suffered much deeper contractions in GDP in the December quarter. Australia's GDP outcome is better than all of the G7 economies.
19 of the 22 OECD countries that have reported December quarter figures contracted during the quarter and this weakness continues to weigh heavily on household spending, investment and exports.
The National Accounts show household consumption grew by 0.1 per cent in the December quarter as the effects of the global financial crisis on wealth and confidence continued to weigh on households.
The boost provided by the Economic Security Strategy saw gross disposable household income increase by nearly 6 per cent in the quarter. Without this boost, consumption would have certainly contracted, as it did in almost all other major economies in the quarter. The Government's stimulus – along with significant interest rate cuts in recent months – will continue to support consumption in coming months.
Business investment growth slowed further in the quarter to 1.1 per cent. Business confidence has been hit hard by the steady stream of bad news from overseas and by the prospects of weaker demand and falling profits. Nonetheless machinery and equipment investment rose by 0.3 per cent and non‑dwelling construction rose by 1.9 per cent. Major private engineering projects continued to underpin investment. Businesses reduced inventory levels during the quarter, aligning their production with expected demand.
Dwelling investment continued to weaken, although the First Home Owners Boost and lower interest rates should support activity during 2009.
Exports weakened in the quarter, particularly non-rural exports, which are being adversely affected by the dramatic slowdown in China and by the sharp contractions in our other major Asian trading partners such as Japan and Korea. Imports contracted sharply, partly reflecting weaker domestic demand, the sharp fall in the exchange rate and the consequent reduction in inventory levels by businesses.
The global economic environment is clearly very challenging and it is likely that global conditions will get worse before they get better. Nonetheless, Australia is better placed than most other countries to ride out the global economic storm.
Australia's financial system is strong and well regulated. Our banks are well capitalised and profitable. We have not suffered the acute financial stresses that banking systems in many other countries have experienced. Australia's housing sector does not suffer the same kinds of problems being experienced elsewhere in the world.
Our macroeconomic settings provide much more flexibility to respond forcefully and quickly to the global recession, as the Government has done. The Nation Building and Jobs Plan will begin to take effect this month, and the Reserve Bank has already reduced official interest rates by 400 basis points, which will help moderate the downturn and support the recovery when it takes hold.
There are no quick fixes to the global recession, and many of its effects are yet to be fully felt. But the Government is doing everything in its power to cushion Australians from the worst impacts of the global recession.
4 March 2009