Economic Growth a Positive Sign for Christmas Donations

This article is by Commonwealth Bank economist James McIntyre is part of a regular series of articles by the Commonwealth Bank, who will be using their financial experts to provide news, insight and expert advice for Not for Profit organisations.

The latest figures on the economy are in. Australia’s GDP grew by 1.0% in the September quarter, as the economy regained momentum from the impacts of natural disasters over the summer. The economy was 2.5% larger than a year ago.

Whilst the overall outcome is positive one, information on the state of household spending and finances is likely to be the main piece of news relevant for Not for Profits.

The latest figures show that household incomes continued to grow solidly in the third quarter. Household disposable incomes grew 2.4% in the quarter, and are nearly 7% higher than a year ago.

Strong household income growth has enabled the household sector to continue to save, and increase spending at the same time.

The household savings ratio rose from 9.1% to 10.1% in QIII. Households have continued to save at their highest rate of income since the early 1980s. The benefit is that the level of higher savings is helping households to reduce their debts and increase their rainy day buffers. The amount of income households are devoting to debt servicing has fallen and remains below pre-GFC levels. Slower growth in debt (courtesy of higher savings) and lower interest rates should ease some of the stress on household budgets from interest costs.

But it is too early to declare that households have fully recovered from the GFC. Household wealth levels remain subdued, and it is likely that the high savings ratio will continue for some time until household balance sheets have been repaired. However, a stable, albeit elevated, savings ratio means that spending is likely to grow in line with income growth. If household income growth holds up, donation flows may pick up, benefitting the NFP sector.

Households increased their spending solidly in QIII. The 1.2% increase in the volume of consumer spending was a key upside surprise in the figures. Spending has been growing at its decade average pace for most of the past 2 years.

But the spending figures show some signs of continued strain. Spending continues to surge on utilities, food, rent, transport, health and education items. Households are continuing to battle higher prices for utilities, food and rents.

Whilst the GDP figures show the economy growing strongly, there are other pieces of information in the GDP data which aligns some of the perceptions of economic weakness.

There was a strong 2-speed dynamic at play in the latest economic readings. Demand surged in WA (+8.4%) and Queensland (+3.5%), whilst spending in other regions barely grew (+0.4%). Whilst household spending grew, business investment surged as the mining investment boom began to take off.

The QIII outcome was distinctive for another reason. For some time the economy has failed to grow at a pace that kept up with population growth, perhaps feeding perceptions of economic weakness. But the strengthening of the economy over the past 6 months has seen GDP on a per capita basis finally exceed its pre-GFC level.

Overall, the GDP figures show the economy in relatively good shape, and the mining investment boom beginning to flow through and boost economic growth. But whilst this economic backdrop appears a favourable one at first glance, the divergences in the pace of growth, particularly amongst regions, is likely to continue to be a challenge for the Not for Profit sector. Firms in the sector are likely to feel pressure from fast growing sectors and regions for their resources, such as staff. Whilst slower growing regions of the economy may simultaneously increase demands on the sector.