The economy posted unexpectedly slow growth in the December quarter, but provided some good news on labour productivity.

The economy’s output of goods and services, measured by gross domestic product (GDP), rose by 0.4 per cent in the quarter according to the national accounts released by the Australian Bureau of Statistics (ABS) on Wednesday.

That was about half the growth rate expected by most economists.

Revisions to previous quarterly results partly offset that, so annual growth came in at 2.3 per cent, close to economists’ expectations.

In its quarterly monetary policy statement in early February, the Reserve Bank of Australia (RBA) forecast GDP growth through 2011 of 2.75 per cent.

Even allowing for the RBA’s preference to round its forecasts to the nearest quarter per cent, and taking into account the normal volatility of economic data, reality still undershot the RBA’s forecasts by a significant margin.

That calls the RBA’s outlook for the coming year or so into question, particularly the near-term outlook for GDP growth of 3.5 per cent through the year to June 2012.

To put that forecast into perspective, the economy would now have to post quarterly growth averaging of 1.1 per cent for both the March and June quarters – well over the long-run average of around 0.8 per cent, for the RBA to hit that forecast exactly.

In other words, it would require the growth rate to nearly double between the second half of 2011 and the first half of 2012.

It’s possible, but it’s now a bit of a stretch to say the forecasts remain on track.

Some good news in the GDP figures came in the form of a pickup in labour productivity.

The broadest measure, GDP per hour worked, rose by 0.4 per cent in the December quarter.

In the market sector of the economy, where productivity can actually be measured in any meaningful way, the rise was a solid 0.6 per cent.

Through the year, those productivity growth rates were 1.1 per cent for the whole economy and a respectable 1.8 per cent for the market sector.

It gets even better once the mining and utilities (electricity, gas, water and waste) sectors are excluded.

Those two sector have undergone a big buildup in capacity in recent years that has not been reflected in a rise in output, biasing total productivity estimates downward.

Neither sector ought to have any impact on the RBA’s concern about domestic inflation.

Iron ore, bauxite and coal do not figure highly in the consumer price index (CPI).

And, while utilities prices have been rising, it’s not because of labour cost pressures, but because the sector has been able to fund its capacity expansion by raising prices rather than issuing shares or borrowing like normal businesses.

It’s arguable that the resulting price rises do not really have anything to do with underlying inflationary pressures.

It is possible to exclude those sectors using estimates based on the industry value-added data from the national accounts and hours-worked data for the middle month of each quarter from the ABS labour force survey.

And when that’s done it turns out that market sector GDP per hour outside the mining and utilities sectors rose by about 3.2 per cent – a heady pace by any measure – through 2011.

That could go some way to easing the RBA’s concern that a lull in productivity growth has lowered potential economic growth rates.

Slow productivity growth implies the economy can expend less before a falling supply of labour increases the risk of rising inflation.

The uptick in productivity growth, to be expected as the economy picks up after a lull, implies a faster economic growth rate can be allowed.