Are we heading for another economic boom? A SmartCompany Q&A

After a prolonged period of patchy economic data, the release of GDP growth figures had the nation’s economists positively bubbling. CommSec’s Craig James called it Australia’s “sweet spot”, while ANZ’s Warren Hogan said the Australian economy is now officially “running hot”.

The stronger than expected GDP result – the market had expected growth for the June quarter of 0.7% and was surprised with a result of 1.2% – has highlighted what great shape the wider economy is in, and just how well we cruised through the GFC.

But as many entrepreneurs know, conditions on the ground remain patchy in many sectors. Are we really headed back towards another boom, or is there reason for caution ahead?

Time for a SmartCompany Q&A.

This is great news – the goldilocks economy just keeps on kicking. Just how well are we travelling?

Very well. While Australia’s growth never actually fell during the GFC, economic growth was largely propped up by large levels of government spending. Of course, those stimulus measures are now fading so as Westpac’s chief economist Bill Evans says, this GDP result was significant in that it shows the private sector has now taken over from the public sector as the major driver of growth.

The figures showed growth during the June quarter was 1.2%, and is running at 3.3% on an annual basis. That’s just below the 3.5% that most economists consider to be “normal” for the Australian economy, but a great result for a recovering economy.

Retail sales and consumer confidence have been a bit patchy, so what is driving the growth? The mining sector as usual?

Actually, household consumption was the real driver in the June quarter, rising 1.6% in what was a major surprise. While we cut our spending on alcohol and gambling as part of our new frugal approach to life, we did let the purse strings loose a bit on rather big ticket items – spending on cars, air travel, health and recreation, and financial services all increased impressively.

The other big driver was construction, which jumped 5.3% in the quarter and over 11% for the year. However, this is a bit of a stimulus hangover, as the construction activity occurring now is related to building approvals granted when the first home buyers grant was boosted during the GFC.

So the household sector is fighting back?

The outlook is certainly improving. While retail sales remain weak, the GDP data shows Australians are still prepared to dip into their savings to some extent for big purchases. The key thing to watch here is consumer confidence – it will pick up as the economy gathers pace, although further interest rate rises could dent that.

Housing construction is likely to fall away a bit. Dwelling approvals and new home sales have fallen sharply since the first home buyers grant was reduced last year. But again, as the economy continues to gather steam, this crucial part of the economy should also improve.

It’s all sounding pretty good to me, but something tells me you’re going to point out the negative.

Only a little one, but it’s an important one for entrepreneurs. Outside the mining sector, business investment remains pretty subdued, with total private business investment falling 0.2% during the quarter.

However, Westpac’s Bill Evans says a recent business investment survey point to a strong rebound in investment in 2010-11 and as the household sector bounces back, businesses will gain more confidence to spend.

Right, well that wasn’t too bad. Now, what was that you said about further interest rate rises?

Well, that’s the downside of growth and higher consumer spending – inflation starts to rise, and the RBA keeps increasing rates.

Exactly when those rises start again isn’t clear. ANZ is tipping one more rate rise later in the year, taking the official cash rate to 5%, while CommSec and Westpac are tipping rates will remain on hold until 2011.

Hmmm. That could take some sting out of the growth, couldn’t it?

To some extent. As Craig James argues, this is something of a sweet spot for the economy, as the tail end of the government stimulus measures meets the start of the second mining boom.

“Unfortunately the forward looking data suggests that activity is likely to remain stuck in third gear in the near-term,” James says.

“Recent economic data has been patchy at best, and the inherent conservative attitude by consumers and businesses is likely to take time to change. No doubt the uncertainty in terms of the global economic story will also figure in the mix.”

CommSec is predicting growth of 3.25% for the year ahead, but there is a clear feeling that growth could be higher than this.

The only thing to watch is interest rates. ANZ expects the official cash rate to be at 6% by the end of 2011, so entrepreneurs need to be prepared for at least five more 25-basis point rises between now and then.