The Australian economy expanded by 1.8% in the second quarter versus the previous year, compared to 1.7% growth in the first quarter, indicating that the commodity dependent Australian economy is continuing to chug along at a moderate rate of growth. The 1.8% increase was in-line with economists expectations.
Beneath the surface, some worrying signs for Australia continue to appear. For one, the terms of trade declined by a steep 6% compared to last year. Terms of trade measure the ratio of export prices to import prices and indicates that the prices for the raw materials that Australia exports – iron ore, coal, gold, natural gas, beef, aluminum, and wheat – fell relative to the manufactured products it imports – things like automobiles and computers. Nothing about that is surprising and commodity prices are always vulnerable.
But, perhaps more alarming is that as weak commodity prices and moderating Asian growth filter through to Australia this quarter’s growth was driven by a decline in how much Australian’s save, not in how much they earn. In this year’s first quarter, the household savings rate in Australia was 5.3%. It fell to 4.6% in the second quarter, boosting consumption growth by 0.7% versus the first quarter and 2.6% versus the prior year.
The Australian savings rate had been rising for a period of time, easing pressure on the current account deficit, after the savings rate had fallen for years.
Australia’s Treasurer, Scott Morrison, sounded unconcerned about the dip and pointed to the lower savings rate as a sign that consumers had greater confidence in the Australian economy. “We are seeing more and more evidence of how things are improving and it’s not surprising that households, families, businesses will reflect that in a lot of their own decisions,” he told reporters in Canberra.