GDP and the Not for Profit Sector - CBA Finance News
20 March 2012 at 9:51 am
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.
SPONSORED ARTICLE: The release of the Gross Domestic Product (GDP) figures for the end of 2011 has implications for the Not for Profit sector.
The biggest news on the economy over the past few weeks has been the release of the GDP figures for the end of 2011. The economy was weaker than expected in the final few months of 2011. Australia’s GDP grew by 0.4% in the December quarter. Growth was expected to be twice that pace. The economy finished 2011 2.3% larger than where it was at the end of 2010.
Some of the details of the GDP figures suggest some of the weakness in the growth outcomes is transitory. But other components, particularly on the income side, suggest that the situation for some parts of the economy may become a little harder over the period ahead. And that has implications for the Not for Profit sector.
There were some odd outcomes in the GDP release. The standout was the fall in business investment. After surging by more than 14% in the September quarter, the 1% decline in business investment looks to be more of a rest than a trend. Indeed, data from the recent capex survey suggests that the mining-led investment boom remains well on track.
A big lift in inventories in the December quarter also boosted growth, although an unusually large decline in farm inventories somewhat muted this. Suffice to say, there were many conflicting factors at work in the GDP figures.
But the big picture themes remain intact. The mining boom is driving a surge in business investment, some of which is leaking through to higher imports. Housing construction remains weak. Consumers are spending at around trend rates, though spending is being directed towards non-retail goods and services.
From a Not for Profit’s perspective however, a shift in another major driver of the economy’s recent performance could pose some challenges. Whilst activity in the economy continues to bump along, income in the economy fell in the December quarter. That fall in income was driven by a decline in the terms of trade. In particular, the price we receive from foreigners for the exports we sell to them.
The first casualty of the turn in the terms of trade in December was company profits, and in particular mining sector profits which fell 8.7%. In time, lower company profits will filter through to lower government tax receipts. With rising commodity prices no longer boosting profits as vigorously, companies are also likely to pay greater attention to their costs. And that could have implications for growth in wages, and also corporate giving. The latter is important for the not for profit sector, given longstanding weakness across parts of the non-mining economy is likely to have increased the reliance of the sector on mining-related giving.
Household disposable income growth also moderated in the December quarter. Wages and salary growth was slower, as the weaker labour market began to impact households hip pockets. Disposable income growth dipped below growth in nominal household spending. And as a result the household savings ratio fell from 9.6% to 9.0%. Households in aggregate still have a large buffer, but some belt tightening may be coming in the period ahead if the jobs market doesn’t show meaningful signs of improvement.
It’s a tricky time ahead for the economy, which poses challenges for all sectors, including Not for Profits. The growth outlook looks strong, driven by the investment boom and mining exports. But the surge in prices that has propelled incomes across the economy for most of the past decade looks to have ended. It has been some time since the economy experienced strong growth that was not accompanied by large increases in incomes.