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September Accounts Confirm
Slow-Down -And No Inflation Threat

The Australian - 21 December 1999

Some analysts have suggested that the 1.6% increase in GDP (seas adj), and the 0.8% increase in the GDP price index for the September Quarter, indicate that the economy has not slowed as had been forecast, that it is growing faster than the (revised) official forecast of 3.5% for 1999-00, and that there are emerging inflationary pressures. Such perceptions are said to confirm the inevitability of further interest rises..

However, one quarter's figures taken in isolation are likely to be misleading. Thus trend GDP increased only 0.8 % in the quarter and has clearly slowed progressively from the peak quarterly increase of 1.3% two years ago. Comparing each half-year with the previous half-year also helps give perspective to recent developments.

Percent Increase on Previous Half Year (Seas Adj)

June/Sept 98 Dec/Mar 98/99 June/Sept 99
GDP 1.9 2.6 1.5
GDP (excl increase in inventories) 1.8 2.4 0.6
Final Domestic Demand 1.5 2.5 1.8
Consumption 1.6 2.3 1.9
Gross Fixed Capital Formation 1.2 3.1 1.6
GDP Price Index 0.2 -0.1 0.8
Domestic Final Demand Price Index 0.9 0.6 0.4
Av Compensation per Employee 1.8 1.8 1.1

This comparison reveals:

  • A significant slowing in GDP growth to an annual rate of 3 %.
  • More significantly, slowing growth in both the total and major components of domestic final demand - to an annual rate of 3.5-4% (final domestic demand excludes effects from changes in inventories or the external account).
  • Without the large increase in inventories, growth in GDP would have been just over 1 % pa. Inventories increased by a massive $4.8 billion in the latest half year, compared with $1.9 billion and $1.6 billion in the two previous half years, and the inventories/sales ratio has increased markedly. This sudden change in trend probably mainly reflects (unfulfilled) expectations by business of consumer spending. In particular, producers of motor vehicles are only now adjusting production to the GST-inspired slackening in demand. In the September quarter alone, inventories of machinery and equipment (with motor vehicles a major component) increased by around $1 billion. As production adjusts, inventories will start to detract from growth.
  • The price index for GDP increased at an annual rate of only 1.6 per cent, importantly due to improved terms of trade. The price index for domestic final demand (a more important indicator of domestic price tendencies), increased at a miniscule rate of 0.8 pa. If anything, this suggests downwards pressure on the rate of inflation.
  • Average compensation per employee increased in nominal terms at an annual rate of only 2.2 %. This is a more comprehensive measure of labour costs than average weekly earnings and it again suggests limited upwards price pressures.

What does all this mean for the official forecast, and for interest rates?

A continuation of the rate of growth in final domestic demand over the past half-year would be consistent with the official forecast for a year average increase of 3.75 per cent. Equally, the prospect of inventories detracting from growth is accurately reflected in the official forecast of 3.5% growth in GDP. Most importantly, saving a marked change from the completely quiescent inflation scene indicated above, it is difficult to see any substantive case for increasing official interest rates further.

Of course, the Reserve Bank bases its interest rate adjustments partly on what it assesses is likely to be happening twelve months or so ahead - the so-called pre-emptive strategy. With the GST coming into operation at the same time as the Budget surplus falls, the Bank may feel pre-emptive action is needed before then. But there is no case for such action on the latest national accounts figures and growth averaging around 3.5% pa should not produce inflationary pressures.