09-12-2016 10:50 AM - edited 09-12-2016 10:51 AM
Australian third quarter GDP data was very weak, declining by 0.5%, missing consensus estimates for a 0.1% fall. Annual GDP growth has now declined to 1.8%, the lowest level since March 2009. All components of GDP were weak in the September quarter and the key points are:
- Soft-ish consumer spending growth (up by 0.4% over the quarter resulting in a contribution of just 0.3 percentage points to quarterly GDP growth) as evidenced by poor retail sales outcomes over the quarter, although this may have been impacted by election uncertainty and poor weather;
- A fall in dwelling investment (-1.4% qoq or a 0.1% point detraction), but this follows a few quarters of very strong growth;
- A marginal lift in private business investment (+0.1% or a flat contribution), with a rise in machinery and equipment investment offsetting a 1.3% qoq fall in non-residential construction as the slump in mining investment continues to impact. However, underlying private investment was actually weaker with the headline being boosted as a large asset transfer from the private to the public sector in the June quarter washed through;
- A large decline in public spending (-2.4% qoq or a 0.6% point detraction) with headline government investment looking particularly low because of the asset transfer in the June quarter. Even adjusting for the asset transfer, public spending was still low in the September quarter;
- A small contribution from total inventories (+0.1% point contribution to growth); and
- A small detraction from net exports (-0.2% point detraction from growth) with import volume growth stronger than export volumes.
Source: ABS, AMP Capital
This is only the fourth quarter of GDP contraction since the last recession ended in 1991 – with the last three being in the December quarter 2000 (after the introduction of the GST), December quarter 2008 (the GFC) and March quarter 2011 (mainly because of a hiccup in exports).
Source: ABS, AMP Capital
While the GDP contraction in the September quarter will no doubt invite talk of a recession (defined as two consecutive quarters of falling GDP) growth is likely to bounce back in the December quarter avoiding a recession so there is no reason to get too gloomy.
A lot of the factors which drove the weak third quarter outcome will not repeat in the fourth quarter GDP numbers. Weak September quarter GDP partly looks like payback for stronger than expected GDP growth over the year to the June quarter of 3.1%. Looking forward, there is going to be a further ramp up in resource export volumes, non-residential building approvals are lifting considerably, mining investment is getting closer to a bottom, retail sales growth trends have picked up again, there is still a lot more dwelling construction in the pipeline, state government budgets indicate a lift in public investment and the rebound in commodity prices with the terms of trade up 4.5% in the September quarter tells us that the income recession in Australia is over. So we expect GDP growth to lift back to around a 2.5% pace in the current quarter and through 2017.
The Australian dollar has remained surprisingly resilient on the poor data, dropping from 0.7465 to around 0.7430 and the share market actually rose 0.2% at the time of writing – indicating that markets also expect growth to bounce back.
But despite our expectation that recession will be avoided and that growth will bounce back, growth is still likely to be fragile and constrained. In an ideal world now would be a time for some fiscal stimulus focussed on infrastructure spending. But with public debt well up from pre GFC levels and the Government focussed on reducing the budget deficit and the (increasingly difficult) task of maintaining Australia’s AAA credit rating this looks unlikely.
As such the pressure is likely to remain on the RBA. With the RBA likely to reduce its circa 3% growth forecasts and further delay the expected return of inflation to its 2-3% target in its February Monetary Statement we remain of the view that it will cut rates again next year. The need to offset increases in bank mortgage rates that are being driven up by the rise in global bond yields and the desire to push the $A lower are additional reasons to expect further RBA monetary easing.
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