ANALYSIS AND COMMENTS


GROWTH RATES IN GDP

In seasonally adjusted terms, GDP increased 0.7% in the December quarter, while non-farm GDP rose 0.8%. Through the year GDP growth was 2.7%.

On the expenditure side, the growth this quarter (in seasonally adjusted volume terms) was driven by the Change in inventories (adding 0.8 percentage points, Household final consumption expenditure (adding 0.2 percentage points), Government final consumption expenditure (adding 0.2 percentage points). Partially offsetting the growth was Private gross fixed capital formation (detracting 0.1 percentage points).

REAL GROSS DOMESTIC INCOME

The real purchasing power of income generated by domestic production is affected by changes in import and export prices. Real gross domestic income reflects the effect of the Terms of trade on GDP. The graph below provides a comparison of quarterly movements in trend GDP (volume measure) and Real gross domestic income. In seasonally adjusted terms, during the December quarter the volume measure of GDP increased by 0.7%, while Real gross domestic income increased by 1.1%, reflecting an increase of 1.1% in the Terms of trade.

TERMS OF TRADE

The Terms of trade represent the relationship between the prices of exports and imports. An increase (decrease) in the Terms of trade reflects export prices increasing (decreasing) at a faster rate than import prices. The Terms of trade rose 1.1% in seasonally adjusted terms in the December quarter following a 1.7% increase in the September quarter.

REAL NET NATIONAL DISPOSABLE INCOME

A broader measure of change in national economic well-being is Real net national disposable income. This measure adjusts the volume measure of GDP for the Terms of trade effect, Real net incomes from overseas and Consumption of fixed capital (see Glossary for definitions). The graph below provides a comparison of quarterly movements in trend GDP (volume measure) and Real net national disposable income. During the December quarter, seasonally adjusted Real net national disposable income increased 0.5%. Growth over the past 4 quarters was 8.7% compared with 2.7% for GDP.

NET EXPORTS CONTRIBUTION TO GROWTH

Net exports represents the difference between exports and imports of goods and services. Net exports detract from GDP growth when the change in the volume of imports is greater than the change in the volume of exports. In seasonally adjusted terms growth in Exports increased 3.0% and growth in Imports increased 3.0% for the December quarter 2010. This means Net exports had no overall contribution to GDP growth in the December quarter 2010 compared with -0.5 percentage points in the September quarter 2010.

HOUSEHOLD SAVING RATIO

The Household saving ratio was 9.7% in seasonally adjusted terms in the December quarter 2010. The trend estimates for Household saving was also 9.7% in the quarter.

Household saving is not measured directly. It is calculated as a residual item by deducting Household final consumption expenditure from Household net disposable income. As the difference between the two aggregates is relatively small, caution should be exercised in interpreting the Household saving ratio in recent years, because major components of household income and expenditure may be subject to significant revisions. The impact of these revisions on the saving ratio can cause changes in the direction of the trend. For more information on the Household saving ratio, refer to Spotlight on National Accounts-Household Saving Ratio.

PRICES IN THE NATIONAL ACCOUNTS

The GDP chain price index was unchanged in the December quarter 2010.

The chain price index for Household final consumption expenditure (HFCE) was unchanged in the December quarter 2010, compared with an increase of 0.4% in the Consumer Price Index (CPI) over the same period. The HFCE chain price index is the National Accounts measure most directly comparable to the CPI. However, it should be noted that the conceptual bases for these two price measures are different. The most important differences are:

• the frequency with which each index is re-weighted,
• the range of lower level indexes contributing to each index, and
• the concepts and treatment of household expenditure, particularly in respect of home ownership costs.

The Chain price index for Private gross fixed capital formation was unchanged this quarter. The Chain price indexes for Non-dwelling construction and Dwellings both increased 0.5%. These increases were offset by falls in the Chain price index for Machinery and equipment (down 1.5%) and Intellectual property products (down 0.1%).

The Domestic final demand chain price index, encompassing changes in both consumption and investment prices, was unchanged in the quarter but increased 1.6% through the year.

The Export chain price index decreased 3.5% during the quarter, but increased 17.2% through the year. The Import chain price index decreased 4.0% in the December quarter and decreased 1.7% through the year.

NATIONAL ACCOUNTS LABOUR MARKET INDICATORS

The National Accounts dataset contains a number of labour market related indicators. Labour costs are the costs incurred by employers in the employment of labour. These costs include wages and salaries, bonuses, paid leave, superannuation, taxes on employment, training and recruitment costs, and fringe benefits (included in wages and salaries in the national accounts). They are of particular interest as they impact on the competitiveness of organisations, employers' willingness to employ and individuals' willingness to supply labour.

Labour costs are reflected in household income via Compensation of employees and therefore have a significant impact on household consumption, investment and saving decisions.

In the December quarter 2010, seasonally adjusted Compensation of employees rose 1.0%, and the seasonally adjusted number of employees recorded in the Labour Force survey rose 0.9%. Average compensation per employee increased 0.1%.

In trend terms, Hours worked increased 0.8% during the quarter with through the year change at 3.5%. In the Market sector (see Glossary for definition) Hours worked rose during the quarter (0.5%) with through the year change at 2.7%. In the December quarter 2010, GDP per hour worked (in trend terms) fell 0.3%. Market sector GDP per hour worked (in trend terms) grew 0.2% in the quarter and 0.9% through the year. Estimates of GDP per hour worked are commonly interpreted as changes in labour productivity. However, it should be noted that these measures reflect not only the contribution of labour to changes in production per hour worked, but also the contribution of capital and other factors (such as managerial efficiency, economies of scale, etc.).

The graph below presents quarterly growth rates in trend GDP and hours worked. The ABS has produced analysis concerning the relationship between GDP and hours worked. For more information please refer to Leading Indicators of Employment (Feature Article in Australian Economic Indicators cat. no. 1350.0, April 2004) and the Research Paper: Analysing the Terms of Trade Effect on GDP and Employment in the Presence of Low Real Unit Labour Costs (cat. no. 1351.0.55.014).

Unit labour costs (ULC) represent a link between productivity and the cost of labour in producing output. A Nominal ULC measures the average cost of labour per unit of output while a Real ULC adjusts the nominal ULC for general inflation. Positive growth in a real ULC indicates that labour cost pressures exist. In the December quarter 2010, the trend Real ULC decreased 0.6% and the trend Non-farm Real ULC decreased 0.4%. The Non-farm measure is generally preferred as it removes some of the fluctuations associated with Agriculture.

CHANGES IN INVENTORIES

Changes in inventories can have a significant impact on growth in quarterly GDP. A positive changes in inventories can be seen as production increasing at a faster rate than consumption but the exact reasons underlying changes in inventories can be far more complex. For example, firms may run up or run down inventories in anticipation of future sales, supply constraints could affect inventories, or firms may under or over estimate sales in a particular period.

The graph below shows GDP growth and the Changes in inventories contribution to GDP growth, both in trend terms. Even in trend terms the Changes in inventories contribution to GDP growth is quite volatile.

Changes in inventories can be disaggregated into a number of industries. The graph below shows the three largest inventory holding industries, Manufacturing, Wholesale trade and Retail trade.

IMPACT OF FLOODS ON THE NATIONAL ACCOUNTS

Widespread flooding began in late December 2010, and continued into January. This flooding will have led to lower production in December and January than would otherwise have been the case as mines were flooded, crops destroyed or damaged and other business' operations disrupted. Since then, there has been economic activity associated with the repair and replacement of damaged property. This activity will continue through 2011 and beyond, although most of it will probably occur within the first six months or so following the floods.

Many national accounts aggregates may be affected by the economic activity associated with the loss of production and damage caused by the floods. Those aggregates for which the impact could potentially be significant include:

• Household final consumption expenditure. The value of repairs to and the replacement of household and personal items will be reflected in this item. The value of repairs to dwellings is not included in this item, as these repairs are considered to be intermediate consumption of the units owning the dwellings.
• Private Gross fixed capital formation. The acquisition by businesses of new assets to replace those damaged in the floods will be reflected in this item. The cost of repairs to business assets, which form part of intermediate consumption, is not included in this item.
• Government final consumption expenditure. The value of repairs to general government fixed assets damaged by the floods will be reflected in this item, together with the value of any additional compensation of employees and materials used in the process of clearing flood debris from public areas.
• General government gross fixed capital formation. The value of the replacement of general government fixed assets (including roads and bridges) destroyed by the floods will be reflected in this item. The cost of repairs to general government assets, which form part of government final consumption expenditure, are not included in this item.
• Exports of goods and services. The closure of a number of ports and the loss of production available for export, particularly in the Mining industry, will be reflected in this item.
• Compensation of employees. Wages and salaries not payable to employees as a result of the loss of production activity will be reflected in this item. Wages and salaries payable to employees involved in the repair and or replacement of assets will be reflected in this item.
• Gross operating surplus and gross mixed income. Decreases in the returns to owners of businesses as a result of lost production will be reflected in this item. Increased expenses of businesses with assets requiring repair will be reflected as a reduction to the returns to the owners of these businesses. Any increases in the returns to the owners of businesses involved in the repair or replacement of assets will be reflected in this item. Also, the value of gross operating surplus on dwellings owned by persons will fall to the extent of additional repair costs associated with the floods.
• Industry gross value added. The value added of industries whose production was disrupted by the floods will be reflected as a decline in this item. The value added associated with repair work will be reflected in the gross value added of the relevant industries. For example, value added associated with repairs to dwellings and other buildings will be reflected in the value added of the construction industry. However, the value added of industries with businesses with assets requiring repair and of the "ownership of dwellings" industry will be reduced because of increased intermediate consumption associated with the repair expenses.
• Household income - secondary income receivable - non-life insurance claims. Insurance claims payable to households as the result of flood damage will be reflected in this item.
• Household income - secondary income receivable - social assistance benefits. Government transfers to flood victims will be reflected in this item.

In summary, the loss of production associated with the floods (i.e. closure of mines) will be reflected in GDP. The repair of damage to dwellings, other buildings and other business assets will have no direct effect on GDP. However, GDP will be affected by the acquisition of assets to replace those damaged beyond repair, and by the repair of motor vehicles for personal use and other personal assets.

There is a possibility that some of the economic activity associated with the aftermath of the floods replace activity that would have otherwise occurred. For example, the diversion of builders to repair damaged dwellings might mean that the construction of new dwellings is less than it otherwise would have been.

For the most part, the regular data sources used to compile the quarterly national accounts will reflect, where relevant, activity associated with the floods. For this reason, it is not possible to separately identify the impact of the floods from other economic activity.

Appropriate adjustments have been or will be made in the few instances where the regular sources do not or will not adequately capture the impact.


RELIABILITY OF CONTEMPORARY TREND ESTIMATES

Trend estimates are used throughout this publication to analyse movements in time series data. Details regarding the procedures used to estimate the trend series are described in the Explanatory Notes (paragraphs 13 - 17) and in Information Paper: A Guide to Interpreting Time Series-Monitoring Trends, 2003 (cat. no. 1349.0). Potential revisions to trend estimates can be indicated by showing the effects of particular changes in seasonally adjusted estimates that might occur in the next quarter. The table below shows the trend estimates for the last ten quarters and the values to which they would be revised if the given movements in seasonally adjusted GDP actually occurred in March quarter 2011. In the absence of any other revisions, seasonally adjusted growth of 0.6% is required in March quarter 2011 to maintain, in March quarter 2011, the trend growth of 0.5% currently estimated for the December quarter 2010.

				TREND ESTIMATE IF SEASONALLY ADJUSTED GDP CHANGES BY THE FOLLOWING AMOUNTS IN MARCH QTR 2011
		Seasonally adjusted GDP as published in table 2	Trend GDP as published in table 1	Grows by 1.0%	No change	Falls by 1.0%
2008
	September	0.5	0.1	0.1	0.1	0.1
	December	-0.9	-	-	-	-
2009
	March	0.9	0.2	0.2	0.2	0.2
	June	0.4	0.5	0.5	0.5	0.5
	September	0.6	0.7	0.7	0.7	0.7
	December	0.7	0.7	0.7	0.7	0.7
2010
	March	0.6	0.8	0.8	0.8	0.8
	June	1.2	0.7	0.7	0.8	0.8
	September	0.1	0.6	0.6	0.6	0.5
	December	0.7	0.5	0.7	0.4	0.1
- nil or rounded to zero (including null cells)