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AUSTRALIAN GDP MISSES

Donald Miralle/Getty Images

Australian economic growth missed expectations in the September quarter of 2017, driven lower by a weak increase in household consumption expenditure, the largest part of the economy.

According to the Australian Bureau of Statistics (ABS), GDP grew by 0.6% in seasonally adjusted chain volume terms, slightly below the 0.7% level forecast by economists.

GDP growth in the June quarter — originally reported as an increase of 0.8% — was revised higher to show an increase of 0.1%, the strongest since the first quarter of 2016.

Despite the small downside miss for quarterly GDP growth, the year-on-year rate increased to 2.8% from an upwardly revised 1.9% level in Q2, the fastest increase since the June quarter last year.

The bounce was assisted by the low base effect created by the 0.3% contraction in GDP reported in the September quarter last year, shown in the chart above.

Showing the impact of strong levels of population growth, real GDP in per capita terms grew by 0.3% in seasonally adjusted chain volume terms, half the level reported for headline GDP. From a year earlier, per capita GDP grew by 1.3%.

Nominal GDP — measuring changes in both volumes and prices — rose by 0.6%, leaving it up 5.9% from a year earlier.

This table from the ABS shows the percentage point contribution to quarterly real GDP from an expenditure perspective.

Of all the components, the one area that stands out was the weakness in household consumption which grew at the slowest pace in close to a decade.

It rose by a paltry 0.1% in seasonally adjusted chain volume terms, suggesting that the weakness seen in retail sales volumes in the September quarter was mirrored in spending on services.

The ABS said this came despite a solid increase in employee compensation over the quarter, essentially the amount paid to Australian workers.

“Compensation of employees (COE) increased in all states and territories, resulting in a national quarterly growth of 1.2% and growth of 3.0% since the September quarter 2016,” the bureau said.

“Despite higher household income, household consumption was weak at 0.1%, in line with the retail trade estimates.

“This weak household spending combined with growth in household income resulted in an increase in the household saving ratio for the first time in five quarters.”

According to the ABS, the household savings ratio inched up to 3.2%, above the 3.0% level reported in the June quarter.

“Gross household disposable income grew 0.5% during the quarter, outstripping the 0.2% growth in current price household final consumption expenditure,” the ABS said. “This is the first time the household saving ratio has increased since June quarter 2016.”

So instead of using an increase in income levels to sustain or boost spending levels, households chose instead to save a little more, resulting in the weak consumption result.

The ABS said that average compensation per employee rose by 0.3% over the quarter, reflecting that most of the 1.2% increase in total compensation was driven by an increase in workers.

“The increase in wages was consistent with the stronger employment and hours worked data that has been reported in the labour force survey,” the ABS said.

Helping to offset weakness in the household sector, most other components added to GDP, especially private sector investment.

Non-dwelling construction added 0.9 percentage points (ppts) to quarterly growth. Investment in machinery and equipment added a smaller 0.1ppts, helping to offset a 0.1ppts decline in dwelling investment.

“Investment was a big positive driver, but was somewhat flattered by a sharp rise in non-dwelling construction which likely came from the installation of two LNG platforms in Western Australia and the Northern Territory,” said Sarah Hunter, Head of Economics Australia at BIS Oxford Economics.

“Nevertheless, machinery and equipment posted strong growth and intellectual property investment also increased. So there are signs that business investment is coming back, and the capex data released last week suggests that this will continue.”

Elsewhere inventories added 0.2% to quarterly growth, in line with expectations.

Net exports made no contribution to growth with a 0.4ppts contribution from exports offset by a 0.4ppts decline from imports. This result was expected.

On the public side, government final consumption expenditure increased 0.2%, marginally adding to growth, while investment fell by 7.5%, slicing 0.4ppts from GDP.

“Public investment decreased 7.5% during the quarter driven by state and local general government (-15.4%),” the ABS said. “This was driven by the acquisition of the Royal Adelaide Hospital from the private sector last quarter.”

On a production basis, the ABS said GDP increased across in 17 of 20 industries monitored.

“Encouragingly, the expansion in national output was broad-based in Q3,” said Stephen Walters, AICD Chief Economist. “The isolated falls were in farming and fishing, information media and telecommunications, and rental and real estate services.”

Source: ABS

To Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, the story of the September GDP report was the divergence between weakness in household consumption and housing construction to the strength in private investment, and whether those trends will continue.

“The real news is that the strength of private investment largely compensated for the weakness of consumption,” he says.

“What happens next depends on whether business investment can continue to offset soft dwellings investment and consumption. We believe it will, resulting in GDP growth accelerating from around 2.2% this year to 2.5% next year.”

However, even with that small improvement, Dales says its unlikely to be enough to see the Reserve Bank of Australia (RBA) begin to lift interest rates.

“Our weaker view on consumption largely explains why we doubt GDP growth next year will live up to the RBA’s 3.0% forecast,” he says.

Others, such as Walters of the AICD, think that with GDP now growing at its trend pace, the RBA will likely begin normalising policy settings should its forecasts be proven correct.

“One clear takeaway for directors is that the economy now finally is growing back in line with potential, pretty much as Reserve Bank economists have been forecasting,” he says.

“So far, so good, on that score, then. If the RBA’s forecasts for next year are realised, which include a lower unemployment rate, rising wages growth, and even faster growth in the economy, interest rates probably will need to rise, just as they already are overseas.

“Indeed, while the RBA yesterday completed an inactive 2017 on the policy rate, officials are very unlikely to repeat this performance in 2018.”

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