The good, the bad and the two-speed economy

CASUAL observers of matters economic could be forgiven for feeling a degree of commentary whiplash this week.

On Monday the sharemarket took a dive. On Tuesday it recovered, but the Reserve Bank cut interest rates on concerns about the global economy. Yesterday the Bureau of Statistics released a glowing economic report card on the Australian economy. And today the release of all-important job figures.

Gloom or boom, what's it to be?

The truth, as it so often does, lies somewhere in between.

First the good news.

The Australian economy, after two decades of uninterrupted growth, continues to power ahead. It grew by a robust 1.3 per cent in the first three months of the year. If this pace of growth were sustained for the rest of the year, the Australian economy would expand by more than 5 per cent, well above its average for the past two decades of about 3 per cent.

That is surprising. What is even more surprising, though, is that households were the biggest contributors to growth in the quarter. Business investment was the other major driver, while net exports (exports minus imports) remain a drag on growth.

Despite recessionary levels of consumer confidence, household spending grew 4.2 per cent over the year. Spending in hotels, cafes and restaurants was up 7.8 per cent, while spending on recreation and culture grew 5.6 per cent.

And this despite the household savings ratio remaining at about its highest for the past two decades. Of every dollar they earn, households are saving about 9¢.

But as long as incomes continue to rise - which they are - not only are there more dollars to save, there are more dollars to spend.