Business investment boosts Australia's economy

GDP: Australia's economic growth improves but disappoints the optimists

The Australian dollar slid about a quarter of a US cent as market participants essentially lowered their expectations that Australia's central bank-already in a lengthy holding pattern-will take action on interest rates anytime soon.

The economy expanded by 0.6 per cent in the quarter, shy of the 0.7 per cent result expected by economists.

"The solid 0.6% growth outcome in the September quarter national accounts has accelerated growth from 1.9% to 2.8% through the year", Treasurer Scott Morrison said. Indeed looking ahead, despite booming public capex and better global growth lifting business conditions, we reiterate Q3 is close to a peak in growth given a "top" of housing activity and flat [houses] prices amid the lagged impact of macroprudential tightening, which coupled with weak wages, implies slow consumption.

The spending figure was so weak because households pulled back significantly on spending at cafes and restaurants, on recreation, household goods, alcohol and tobacco and health services.

The household savings ratio also ticked up 0.2 per cent to 3.2 per cent, suggesting that households have been reluctant to run down savings to fund consumption.

Households also pulled back on renovations.

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"If you can't get a stronger consumer, it's pretty hard to get momentum going in GDP", said Su-Lin Ong, Sydney-based chief economist at RBC Capital.

However, household consumption was "soft" even though October's retail sales figures, released on Tuesday, showed some improvement.

"The big concern is whether households, the engine of the economy, accept that expectations of a lift in wages growth are unjustified and it becomes necessary to adjust spending to a lower income outlook", he said.

"Looking specifically at investment, new private business investment is now growing at the strongest rate since the peak of the mining investment boom in 2012, expanding by 2% in the quarter and 7.5% through the year, to eclipse the 20-year average", he said.

Corporate sentiment is high, buoyed by strengthening global growth and robust exports, contributing to a jump in private investment over the quarter. "We believe it will", said Paul Dales, chief economist at Capital Economics.

This came despite compensation for employees increasing by 1.2 per cent for the quarter and 3.0 per cent over the past 12 months.

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