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What the GDP figure for June really means

GDP is a backward-looking economic indicator.

That means that today's number is actually telling us about the state of the economy three months ago.

However, it is still very important. Gross domestic product is one of the most important economic indicators in a modern economy because it shows the rate at which the economy is growing.

These are some of the recent drivers of Australia's GDP, and components within the figure, that economists say we should be looking at.



This is the most important figure from today's numbers.


The rise in inventories in the June quarter accounted for the large majority of the 0.5 per cent growth in GDP overall.

If inventories didn't grow by this much GDP would have been negative for the June quarter.

The rise in inventories indicates that firms have been producing their goods without interruption from the weather, so much so that they have begun to stockpile them.

However, the reason why firms have had to stockpile their goods is because exports have been falling. In fact, net exports were the biggest detractor from GDP growth in the June quarter, slipping 0.9 percentage points.


Consumption spending

Today's figure shows consumption increased by 0.5 per cent in the June quarter, and by 2.2 per cent over the last 12 months.

That is a very weak figure.

This is important because consumption is the largest component of GDP.

Private consumption comprises a little over 50 per cent of GDP in Australia (which is quite low by comparison with many 'Anglo' countries).

Changes in final consumption expenditure from one period to another have a significant impact on movements in GDP.

Retail sales figures (one component of consumption expenditure) were weak in the June quarter and that has had a big influence on the figure.

But Treasurer Joe Hockey on Wednesday said he believed consumers were becoming more confident and would soon start to spend more.


Household saving ratio

The 'household saving ratio' measures the difference between household income and household consumption.

If the ratio increases, that means households are saving more and consuming less from each pay packet.

The ratio jumped to a 20-year high in 2008/09, hitting a seasonally adjusted 12.9 per cent of household disposable income, but last year it slipped below 10 per cent, and it is now sitting around 9.4 per cent.

That means households are beginning to spend more of their income that they were at the height of the global financial crisis.

Will this feed through to higher retail sales over 2014?