Australia's next economic growth update is likely to be disappointing if this indicator is any guide

Jeff J Mitchell/Getty Images
  • Australia’s economy slowed sharply in the second half of 2018, growing at a below-trend pace of 2.3% in the year to December.
  • Trend growth is the level where economic growth is sufficient to keep inflation and unemployment stable.
  • Following the growth slowdown, inflation has weakened and unemployment has risen in early 2019.
  • ANZ’s “Stateometer” suggests a majority of Australian states saw growth decelerate to below-trend levels in the first quarter of 2019.
  • Australia’s Q1 GDP report will be released on Wednesday 5 June.

Australia’s economy slowed sharply in the second half of last year, recording the first “per-capita” recession in well over a decade.

At 2.3%, the annual expansion in GDP was the slowest since late 2017, and well below the 3%-plus levels seen in the first half of the year.

It was also under the 2.75% pace widely regarded as Australia’s “trend” growth rate, the level where the economy grows sufficiently to keep unemployment and inflation stable.

It’s little wonder why inflationary pressures have softened and unemployment has risen in early 2019.

Next week, Australia will receive its latest economic report card with the release of G1 GDP.

Based on economic indicators received in the March quarter, including the early GDP inputs such as retail sales volumes and construction work done, the sluggish performance from the economy late last year looks set to continue in the latest growth update.

This chart from ANZ Bank underlines that point.

ANZ Bank

ANZ has dubbed it the “Stateometer”, a visual indicator that measures the performance of Australian state and territory economies over a particular quarter compared to their individual trend growth levels.

For clarity purposes, any state and territory in the top half of the chart is deemed to be growing at an annual pace above trend, while those in the bottom half are growing at below trend pace.

On the bottom axis, anything on the left suggests that economic activity is slowing, while anything on the right indicates it’s accelerating.

Got it?

Put bluntly, if a state is located in the bottom-left quadrant of the Stateometer, it indicates that economic growth is not only below trend but weakening further.

Unfortunately in the March quarter, all state and territory economies bar South Australia, New South Wales and the ACT were doing just that — growing below trend and decelerating.

Only the South Australian economy actually managed to grow faster, and at an above-trend pace, in early 2019.

While the Stateometer isn’t designed to predict actual Australian GDP growth, the broad weakness last quarter points to the likelihood of another disappointing performance from the Australian economy when the national accounts are released next Wednesday.

As for the main catalyst behind the weakness last quarter, Cherelle Murphy, Jack Chambers and Adelaide Timbrell, members of ANZ’s Australian economics team, said the “ongoing adjustments in the housing cycle continued to weighed on the bigger states”.

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