Business investment the latest sign of growing national economy

Business investment is providing the latest boost to the national economy, an upbeat Treasurer said yesterday

Treasurer Scott Morrison.

Public-sector spending and debt-fuelled household consumption are contributing the most to keeping the economy afloat but business investment is starting to improve, the latest national accounts have revealed.

Scott Morrison said the 0.8 per cent economic growth in the June quarter, more than double the pace observed in March, was vindicating the government’s optimistic budget forecasts and foreshadowed rising wage growth.

“This is a strong set of growth figures. It’s consistent with what we’ve seen in other large economies — whether it’s in the US, the UK,” the Treasurer said.

“Based on these figures today and other data that has come, we will achieve better than the budgeted outcome for the fiscal year of 2016/17,” he said, noting growth had exceeded the May budget forecast of 1.75 per cent for the year.

But economists, critical of the government’s growth and wage forecasts since the budget, highlighted the economy’s dependence on public spending, which comprised more than three-quarters of the quarterly economic growth, and further signs of stagnant wages. “There’s precious little evidence of the rise in wage growth the RBA is banking on,” said Paul Dales, chief economist for Capital Economics in Sydney.

“You need to go back to the recession of the early 1990s to find a sustained weaker backdrop for the nominal measures,” said Deutsche chief economist Adam Boyton, pointing to sluggish wage and household income growth.

Total employee costs rose 2.1 per cent over the financial year thanks to rapid job and population growth, but wages per worker per hour fell 0.3 per cent over the year.

“We’re seeing more people getting into work and that’s a good thing … and the precursor to seeing wages move is also an increase in investment and an increase in profitability and we’re seeing all of those measures heading in the right direction,” Mr Morrison said, echoing optimism by Reserve Bank governor Philip Lowe in a speech this week.

“The laws of supply and demand still work. Even at the moment, we see some evidence ... that in those pockets where demand for labour is strong, wages are increasing a bit more quickly than they have for some time,” Dr Lowe said.

Profits fell a little in the June quarter but still finished the year 21 per cent higher, contributing to the record low wage share of national income, which is hovering at about 52 per cent. “There’s no chicken-and-egg conundrum when it comes to wages and profitability. Companies have to make money in order to pay more in higher wages,” Mr Morrison said

Despite a fall in mining investment in the June quarter, overall business investment, especially in new machinery, rose for the third time in a row, the first time that has happened since 2012.

Household saving has fallen steadily since a post-GFC peak of 10.9 per cent in 2011. Mr Morrison said the fall was a “statement of confidence” in the econ­omy.

“This speaks to the underlying weakness of real income growth and is not a sustainable state of affairs given that consumption firepower is likely to be limited further from here,” Ben Jarman, an economist at JP Morgan, said.

All states except Western Australia, and the territories, expanded over the quarter.