Australia may be set for a record 22nd straight year of economic expansion, but it will not save the federal budget or Prime Minister Julia Gillard’s job. That was the message from the latest economic data along with an election in Western Australia state, where voters handed Gillard’s Labor Party another drubbing.
Recently, the Australian Bureau of Statistics reported the seventh consecutive rise in Australia’s gross domestic product, up 0.6 percent in the December quarter for an annual increase of 3.1 percent.
The rise met market expectations, with the Australian dollar and shares strengthening afterwards. It came a day after the Reserve Bank of Australia left its official cash rate steady at 3 percent for the second straight month.
Trumpeting the GDP result, Treasurer Wayne Swan said the rise reaffirmed the economy’s resilience, “far outstripping every major advanced economy and the vast bulk of the developed world.”
“Australia has managed to achieve solid growth in the December quarter at a time when around half of all advanced economies contracted, including five major advanced economies. Australia's around-trend growth rate over the year is more than four times the OECD average,” he said in a statement.
Public infrastructure spending and exports were the biggest contributors, with the mining expansion helping new business investment to reach a record high as a share of GDP.
Importantly for economists seeking new sectors of growth outside mining, dwelling investment rose 2.1 percent for its fastest quarterly expansion since June 2010.
However, households remained cautious, with consumption growing by only 0.2 percent in the quarter amid sluggish employment growth and high household savings. The terms of trade – the value of exports relative to imports – also declined, falling by 2.7 percent to be nearly 13 percent lower over the year due to weaker commodity prices.
AMP Capital’s chief economist, Shane Oliver said the result was “right on consensus.”
“[Growth] has been 0.6 – 0.7 percent for [the] last three quarters, implying a 2.5 percent annualized pace. So [the] slowdown has happened, but doesn’t look to be getting worse,” he said.
But while real (after-inflation) GDP met expectations, nominal growth only expanded by 0.5 percent in the quarter and 2 percent from a year earlier – well below the government’s previous forecasts.
“It is unusual for nominal GDP to grow this slowly, and this continues to drag on the government’s revenue collections,” Swan admitted.
Since the federal treasurer handed down his October midyear budget review, government revenues are already $6 billion below forecast, making it even harder for the Labor government to deliver its multibillion-dollar promises on education and a national disability insurance scheme.
The weaker nominal GDP growth also means Swan will announce his sixth consecutive budget deficit as treasurer in May, despite having repeatedly pledged that 2013 would be the year the budget returned to surplus.
Credit ratings agencies have warned the federal government to keep its debt level under control, should it wish to maintain its triple-A rating. While having a reportedly low debt to GDP ratio of around 10 percent, Standard & Poor’s has warned that the nation’s weak external position could lead to a downgrade if “external imbalances” increased.
Leadership challenge?
Yet while the treasurer pointed to the economy’s “solid growth, low unemployment, contained inflation and low interest rates,” voters do not appear to be celebrating.
In resource-rich Western Australia, a state which posted more than 14 percent GDP growth in the past year, voters on Saturday delivered another blow to Labor by handing WA Premier Colin Barnett’s Liberal-National alliance a landslide election victory.
Former Western Australia Labor planning minister, Alannah McTiernan, urged the prime minister to step down following the rebuke from voters to her party’s mining and carbon taxes.
"You can't be a leader if people don't want you as their leader. Unfortunately, that has to be a reality that our prime minister needs to take on board," she told ABC radio.
The center-left Labor Party is in opposition in the four biggest of the nation’s six states. In the latest opinion poll published by The Australian on Tuesday, Gillard’s government trailed the conservative Liberal-National Coalition by 48 to 52 percent after preferences, giving Labor a mountain to climb before the federal election slated for September 14th.
Amid speculation of another challenge by ousted former leader Kevin Rudd, Gillard will be hoping the economic sunshine continues in the ‘Lucky Country’ for at least a little while longer.