Australian economic growth slowed sharply in the first three months of the year, leaving the annual pace of growth at the weakest level since late 2009, the tail end of the global financial crisis.
According to the ABS, GDP expanded by 0.3% in the March quarter in seasonally adjusted chain volume terms, seeing the year-on-year increase slow to just 1.7%, the weakest expansion since the September quarter of 2009.
The result was in line with market expectations, but well below the 1.1% increase recorded in the prior quarter.
“The Australian economy began 2017 with a whimper following a decent pace of expansion in the final quarter of 2016,” said Gareth Aird, senior economist at the Commonwealth Bank.
Despite the sharp deceleration, the small expansion saw Australia’s run of uninterrupted economic growth stretch to 103 quarters, equaling the record held by the Netherlands for a developed nation not experiencing an economic downturn.
Household consumption — the largest part of the Australian economy at around 60% — grew by 0.5% for the quarter, seeing the increase on the same quarter a year earlier at 2.3%.
“This was driven by rises in rent and other dwelling services, electricity, gas and other fuel, operation of vehicles and insurance and other financial services,” said the ABS.
It contributed 0.3 percentage points (ppts) to the quarterly GDP figure.
The increase in household consumption was likely helped by a further reduction in the household savings ratio, dropping to 4.7% from 5.1% in the December quarter.
“This was driven by subdued growth in gross disposable income being offset by the growth in current price household final consumption expenditure of 0.9%,” said the ABS.
Australian households are now saving less, the fourth quarter in a row that has been reported, driven largely by higher costs and weak growth in incomes.
Also helping to boost consumption, the ABS said that compensation of employees — what we earn — rebounded by 1.0% during the quarter, completely reversing a decline of 0.7% in the final three months of 2016.
That left it up 1.5% from a year earlier — a small improvement on the level reported previously — but still incredibly soft.
The table from the ABS shows the breakdown of the GDP report from an expenditure perspective. We’ve highlighted the column that shows each component’s contribution to quarterly economic growth.
Outside of household consumption, government consumption and non-dwelling construction both added 0.2ppts to GDP.
Growth in inventories, at 0.4ppts, made the most significant contribution to growth having detracted from GDP in the previous quarter.
Offsetting those positive contributions, the ABS said dwelling construction, government investment, business spending on machinery and equipment, and net exports all detracted from quarterly growth.
Weaker local and federal government investment drove the decline in public investment.
While GDP measured in volume terms decelerated sharply, nominal GDP — capturing movements in both volume and price terms — grew at a substantially faster pace, as was the case in the final quarter of last year.
It increased by 2.3%, far higher than real GDP but still below the 3.2% lift in Q4 last year.
“The recent growth in current price GDP is being influenced by the increase in the terms of trade.” said the ABS.
“The terms of trade increased 6.6% in the March quarter 2017, following a rise of 9.6% last quarter. This was driven by a 9.4% increase in the export price index.”
Higher commodity prices, in other words, helping to boost national incomes during the quarter.
From a year earlier, nominal GDP grew by 7.7%, the fastest increase in six years.
However, with the prices for Australia’s key commodity exports now significantly lower than the March quarter, that economic tailwind looks to reverse in the current quarter.
While economic growth has decelerated sharply, both during the quarter and over the past year, part of that slowdown has been driven by temporary weather events such as Cyclone Debbie and higher-than-usual rainfall, particularly in the eastern states.
That’s partially contributed to the large quarterly swings that have been seen in recent quarters.
Looking through the volatility, the one constant theme has been that household consumption — the linchpin of the economy — has been far weaker than usual, something that is no doubt being impacted on by weak wage and incomes growth, along with increased indebtedness.
Only yesterday, the RBA acknowledged that slow growth in real wages “is” restraining growth in household consumption.
The key question now is will that remain the case in the quarters ahead?
Developments in the housing and labour markets will likely determine how things play out, not only for consumption levels but also the outlook for broader economic growth.
Aird sees plenty of concern on that front.
“Compensation of employees, at just 1.5% through the year, is an incredibly weak outcome and reflects the impact of low growth in both wages and hours worked,” he says.
“This weakness is having a direct negative impact on discretionary household consumption. And the feedback loop between consumption expenditure and household income growth poses a risk to the Australian economy.”
However, despite those risks, Aird says that the RBA is unlikely to respond with another rate cut to help bolster economic activity, even with growth running well below the bank’s forecasts offered just one month ago.
“Today’s growth outcomes have significantly undershot the RBA’s expectations and it will take a heroic effort from here for GDP growth to meet their year-end forecast,” he says.
“We think that Governor Philip Lowe is desperate not to cut rates given it risks stimulating the housing market again. As such, we think that policy easing is off the table unless the housing market falters or the unemployment rate materially rises.”
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