Australia, The Lucky Country

Details of Australia’s GDP were released yesterday. Good news is, the country is growing! That makes it 26 years in a row of uninterrupted growth. A record no other country has ever achieved. So what is GDP, what does it mean and why do we care?

So what is GDP?
GDP is a measure of the size of an economy.

If you added up the value of everything produced in Australia over a year, including every product bought and every service paid for, you would get a total of about 1.6 trillion dollars. That figure is what economists refer to as Australia’s GDP. Or, put another way, the size of Australia’s economy.

Why do we care?
Like we said with the stock market (see here and here), it’s not the absolute level of GDP people care about, it’s the percentage change in it over time.  GDP and therefore GDP growth is reported four times each year, at the end of the March, June, September and December quarters.  Yesterday the June-Quarter details were announced.

If GDP is going up, it means more money is being spent on things made and done in Australia. This is obviously good for business which in turn is good for jobs. Easy enough. Now remember, the RBA’s main role is to set a level of interest rates (ie the price of money) which encourages people to spend, but not too much so as to stoke inflation, but not too little either (see here). So the RBA cares A LOT about GDP growth. If GDP growth is too low, they will start thinking about reducing interest rates to make money cheaper and encourage people to spend. If it’s too high, they may think about increasing interest rates, to slow the economy down.

So happened and what should you expect?
Yesterday’s news release said that the Australian economy (ie GDP) grew by 0.8% in the June quarter and 1.8% for the financial year 2016/17. This is decent, without being too amazing. A bit like Shrek 2. The RBA will be braodly happy with this as in general, they view 2-3% annual growth as about right.

So for interest rates specifically, it probably makes it more likely that they will be going up rather than down in the future.But nothing is for certain. Stay tuned.

And that’s 5 minutes. Hope it helped.

Categories: Investing

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