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Better public/private sector balance and the return of investment and productivity
This week’s national accounts confirmed that the Australian economy is not only growing but is doing so with a healthier composition as the private sector takes the baton from the public sector. While both private and public sector demand expanded this quarter, trends over the last year highlight the increasing role being played by the private sector.
In the year to September, private final demand grew by 3.1%, up from just 0.6% a year earlier. In contrast, public final demand slowed to just 1.4% growth, down from 4.8% a year ago.
Consumer spending remains robust, with real spending increasing by 2.5% over the year to September, underpinned by a 3.8% expansion in real disposable incomes. With incomes and wealth improving, households, on average, are in a much better financial position than two years ago.
This has allowed households to maintain spending, while at the same time lift their saving rate to 6.4%, from a low point of 1.8% at the height of the cost-of-living crisis. As we flagged in last week’s Brief, there were welcome signs of a recovery in business investment in the September quarter, up 3.2%, and future capital expenditure intentions have also lifted.
Stronger investment adds to the supply side of the economy via an increase in the capital stock, which should enable workers to become more productive. And there were positive signs for productivity in this week’s data, with GDP per hour worked rising by 0.8% over the last year.
Productivity gains in the market sector, outside of mining and construction, have been particularly healthy, at 1.8% growth in the year to September. But even the drag from the mining and construction laggards is showing signs of easing.
Productivity in the mining and construction sectors fell by 1.2% and 0.8% respectively in the year to September, both significantly improved compared to recent outcomes of -8.1% and -4.8%, a year ago. If government reforms can ease regulatory burdens and bottlenecks in the mining and construction sectors, there is room for productivity to surprise on the upside, which would lift the speed limit for the economy.
In addition, productivity in the non-market sector, which accounts for just under one-third of employment, has stabilised in the last two quarters after falling by over 5% from its pre-pandemic levels. However, despite the positive developments in productivity, cost pressures in the economy remain elevated, with unit labour costs rising by almost 5% in the last year.
This remains a critical pressure point for inflation. Without a slowing in wage growth and further improvement in productivity growth, growth in unit labour costs will remain elevated and inflation will struggle to move back into the RBA’s target band.
The broader recovery in Australia’s economy is a good news story. The balance between private sector spending and public sector spending is healthier, as is the balance between household spending and business investment. Productivity, which has languished for years, appears to be on the improve. Growth in economic activity is close to trend and the labour market is strong, with the unemployment rate at 4.3%.
Over 2026, we need to see a continuation of these trends of a better-balanced composition of economic activity, stronger business investment and rising productivity growth. In the interim, the RBA must provide stability by keeping rates on hold, allowing the economy to correct its current imbalances.