Is the Aussie Economy Getting Stronger?

Today investors found out that the Aussie economy strengthened in the June quarter. Quarterly gross domestic product (GDP) figures grew by 0.8%, beating the previous quarter by 0.5%.

What Caused Aussie Economy Growth?

Helping the growth was higher spending on food, clothing and household furnishings. As reported by The Australian Financial Review:

‘The data supports the Reserve Bank of Australia’s view that the economy will return towards growth rates closer to 3 per cent over the coming year, as signs emerge that a long-standing non-mining business investment strike is ending and employment outcomes are firmer.’

Before you call the next interest rate rise on the back of upbeat growth, consider that Aussies were actually worse off even as the economy improved.

How?

While households spent more, they also saved less without earning significantly more. The nation’s household savings rate fell from 5.3% to 4.6% for the quarter.

Source: ABS

‘Better days ahead,’ Treasurer Scott Morrison said. He continued: ‘…we are seeing more and more evidence of things improving and it’s not surprising that households, families, businesses will reflect that in a lot of their own decisions.’

Aussie Wage Growth Still Low

Yet if wages growth doesn’t start to pick up, it’s hard to see how Morrisons ‘better days ahead’ assessment can become a reality. Wage growth remains at around 0.3% for the quarter, and slightly above inflation at 2.1% for the year.

Morrison said the savings dip was a statement of confidence by consumers. He did acknowledge wage growth would not surge until company profits improved:

‘There’s no chicken and egg conundrum when it comes to wages and profitability and investment.

‘What has to come first is companies have to make money to be able to pay more in higher wages.

‘You can’t get a pay rise in a business that isn’t making any money and you can’t get a job in a business that’s shut.’

Morrison must be expecting company profits to surge for the economy to see better days. Of course, Morrison has as much chance of guessing year-to-year earnings as anyone. I suspect if wages don’t pick up and household debt doesn’t fall, Morrison will constantly be thinking of better days.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

PS: Low interest rates are likely here to stay. But it’s not all that bad. There’s a way you could profit from interest rates staying where they are. Find out how here.

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Härje Ronngard

Harje Ronngard is a Junior Analyst at Markets and Money.

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.