September quarter GDP taking stock of the Australian economy

Principal Economist, Drew Klease

In last week’s Brief (Is the Australian economy bouncing back?), we expressed the view that the September quarter Nationals Accounts would reveal an Australian economy continuing on a gradual path of recovery towards trend growth. The data (released on Wednesday) showed that real GDP (the broadest measure of domestic economic activity) grew by 0.6% in the September quarter, lifting the annual growth from 1.9% to a trend rate of 2.8%.

As we flagged last week, the surge in the annual rate overstates the extent of the rebound as it reflects base effects following adverse weather conditions that temporarily suppressed last-year’s September quarter economic activity. That is, a growth rate closer 2.8% rather than 1.9% is more indicative of the pace of economic growth in the Australian economy.

Apart from showing growth at just under trend, the National Accounts data also showed that the economy is currently being driven by business and public investment expenditure. Real private new business investment rose 2.0% in the September quarter and is now up 7.5% over the past year.

This is a substantial turnaround from the 10% falls seen during 2015 and 2016 as the mining investment downturn intensified. Diminishing headwinds from the mining sector are now clearly apparent, with mining capex flat over the September quarter.

More importantly, there are ongoing signs of improvement in non-mining sectors of the economy. We estimate that new non-mining business investment rose 2.7% in the September quarter to be up almost 14% over the past year.

The other main driver of the economy continues to be the ramp-up in public infrastructure spending. Excluding the impact of second-hand asset purchases, public investment remained strong, rising 5% in the September quarter, led by the substantial infrastructure projects underway in New South Wales and Victoria.

The data also revealed the headwinds to the economy. Of most concern is the weakness in consumer spending, which rose by a tepid 0.1% in the September quarter, mirroring the weakness seen in retail sales. Household spending continues to be weighed down by weak income growth, with real disposable income rising by just 0.7% over the past year.

The other factor that is starting to restrain household spending is the cooling housing market. For some time, wealth effects from the booming property market have led consumption growth to outstrip income growth, leading to a falling household savings rate. 

However, with house prices now stabilising (and falling in Sydney), households have become more cautious in their spending habits, lifting their savings rate in the September quarter (from 3.0% to 3.2%) for the first time in a year. Slowing activity in the housing market led dwelling investment to drop 1% over the quarter, with investment now down almost 5% from the peak seen in late 2016.

What do we conclude from September quarter’s mixed data?

There are promising signs of a turnaround in non-mining investment and diminishing mining headwinds. Furthermore, the ramp-up in public infrastructure spending is also supporting activity, particularly in New South Wales and Victoria.

However, while consumer spending should improve from its lacklustre performance in the September quarter, consumption growth is likely to remain below-trend due to a modest correction in house prices and subdued income growth. Housing investment will also remain under pressure, although given the recent resilience in building approvals and work in the pipeline, the weakness is more likely to be seen in late 2018 and 2019.

Looking ahead, we expect growth in the Australian economy will remain around its current pace and retain our forecasts that real GDP growth will average 2.7% in 2018, up from 2.3% on average in 2017. Improving business investment trends, a likely pick-up in net exports as LNG production in Western Australia ramps up and ongoing government infrastructure spending should help support growth and employment in the Australian economy.

Table 1: Financial market movements, 30 November – 7 December 2017

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,637.0

-0.4%

US

2.36%

-4.6 bps

US Dollar Index (DXY)

93.80

0.8%

Nikkei 225

22,498.0

-1.0%

Japan

0.06%

1.8 bps

USD-JPY

113.09

0.5%

FTSE 100

7,320.8

-0.1%

UK

1.25%

-7.7 bps

GBP-USD

1.347

-0.4%

DAX

13,045.2

0.2%

Germany

0.29%

-7.4 bps

EUR-USD

1.177

-1.1%

S&P/ASX 200

5,977.7

0.1%

Australia

2.52%

1.9 bps

AUD-USD

0.751

-0.7%

 Source: Bloomberg

For Economic Update by region, click here.

 

 

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