The Economy: Growth Jumps, Surprising Gloomsters

The Australian economy isn't dying in a ditch or sliding towards a recession; yesterday's national accounts for the June quarter make that clear.

A 1.2% rebound in the second quarter, and a substantial revision to that initially reported nasty 1.2% fall in the three months to March.

That's now a fall of 0.9% as the impact of the floods in Queensland in particular were not as bad as first estimated.

An interest rate cut isn't needed, and won't happen unless events in Europe are so threatening that the RBA needs to protect the economy from the incoming shock, as it did from 2008 to 2009.

The news helped boost the stockmarket, with a 2.6% gain by the close last night. That should continue this morning after 2% gains in some offshore markets.

Overall, the 1.2% rise in the quarter was above the 1% of most market forecasts (a few were around 1.2%). Non-farm income rose 1.2% as well after falling 1% in the first quarter.

But a better idea of the strength of the economy (its underlying strength, to use a phrase beloved by companies at the moment) can be gained by comparing the growth in some of the components in the national accounts to the 1.2% rise.

For example real gross domestic income soared by a whopping 6.5 % as the terms of trade hit a record high (up 5.4% in the quarter and 12.95% over the year).

Real net national disposable income was up by 3.7% over the past four quarters, compared with GDP growth of 1.4% on the same basis.

More hours were worked and workers were significantly better paid for them - employee compensation rose 1.7% in the quarter to be up 7.5% over the year.

That increase reflected strong growth in earnings and growth in employment.

As a result, household consumption held up well, growing by 1.0% in the quarter and 3.2% through the year (after a 3.4% annual rate in the year to March).

But that doesn't disguise that consumption was patchy: just look at the variable returns in retailing in the six and 12 months to June.

The household saving rate remained high at 10.5%, down from the 11.5% rate in the March quarter.

But while consumers are saving more, because they are cautious, they are still spending it, but on things like cars, internet purchases, travel and going out.

Higher rents though were a big negative in the quarter.

Business investment continued to grow strongly in the quarter and further substantial increases are planned as last week's capital spending figures confirmed (with mining the stand out).

New private business investment rose 1.7% in the quarter to be around 10% up over the year. New machinery and equipment investment, which rose 3.4% to be up 13% in the year, new engineering construction also increased 2.1% in the quarter to be over 25% higher through the year.

But non-residential dwelling construction fell 3.2% in the quarter to be down over 11% over the year.

Dwelling investment was flat in the quarter and was up only slightly over the year.

Government spending fell and will go falling over the next two years as the budget deficit contracts.

So public investment fell 3.8% in the June quarter. The decrease was across all levels of government.

The 12.9% surge in the terms of trade over the year (and 5.4% in the quarter) boosted incomes growth.

That boost has come from mining, especially iron ore, coal, LNG, oil and gold.

While some parts of the economy are weak and some states are weak, the growth and its make-up belies the weak business and consumer confidence data.

Exports were negative as shown in the current account data, but the 0.5% negative contribution was sharply down from the 2.4% reported for the first quarter.

Private non-financial corporate gross operating surplus rose by over 10% over the June quarter, with mining profits up 15% in the same time.

So what does this mean? Well it means the economy is healthy.

This is shown by these examples: incomes are growing faster than overall growth, where consumption is growing faster than growth, investment is growing significantly faster than the overall growth in the economy.

This is not an economy which is in need of a rate cut.

It isn't a two speed economy: the growth drivers are spread across the country and most sectors.