- Australian economic growth decelerated in late 2017
- Household spending rose strongly, offsetting weakness in construction and exports
- GDP growth was flat in per capita terms and output per hour went backwards over the year, meaning productivity remains poor
Australian economic growth slowed in late 2017, undermined by weaker construction and exports, offsetting a strong rebound in household spending.
According to the Australian Bureau of Statistics (ABS), GDP grew by 0.4% in seasonally adjusted chain-volume terms in the December quarter, undershooting forecasts for an increase of 0.5%.
September quarter GDP, previously reported as an increase of 0.6%, was revised up to 0.7%.
With the quarterly GDP missing fractionally to the downside, the year-on-year growth rate slowed to 2.4% from 2.9%, below the 2.5% level expected by both the RBA and economists alike.
Compared to 2016, the economy grew by 2.3% in 2017.
In per capita terms, real GDP was flat during the quarter and up 0.8% over the year. Including both volumes and price movements, nominal GDP grew by 0.8% for the quarter, leaving the increase on a year earlier at 3.5%.
“Growth this quarter was driven by the household sector, with continued strength in household income matched by growth in household consumption,” said Bruce Hockman, Cheif Economist at the ABS.
Household consumption expenditure — the largest part of the Australian economy — grew by 1% over the quarter, contributing 0.6 percentage points (ppts) to GDP.
It was the largest quarterly increase since mid-2016.
“This was driven by rises in health (3.4%), hotels, cafes and restaurants (2.9%) and recreation and culture (2.0%),” the ABS said. “There were falls in electricity, gas and other fuels (-3.1%) and food (-0.7%).”
Government consumption also lifted by 1.7%, adding an additional 0.2ppts. Federal government consumption rose by 3.1% over the quarter, outpacing a 0.7% increase for the states.
Public sector investment also chipped in, rising by 2.9%, adding 0.2ppts to GDP.
“This increase was due to an asset transfer from the private sector,” the ABS said.
Business investment on machinery and equipment also contributed 0.1ppts to growth.
Those positives were partially offset by higher imports and lower exports which lopped 0.1ppts and 0.4ppts respectively off the quarterly figure.
Construction of dwellings and non-dwellings also dragged, detracting 0.1ppts and 0.4ppts respectively. Weakness in the latter was driven by a sharp drop in engineering construction, overriding strength in non-residential building.
Inventories made no contribution to GDP, as expected.
This table from the ABS shows the contribution of of individual components in expenditure terms.
Helping to fuel the sharp recovery in houshold consumption, the ABS said employee compensation rose by 1.1% over the quarter, driven primarily by a strong increase in employment rather than increased wages.
“The increase in wages is consistent with stronger employment data reported in Labour Force, as well as a lift in the growth rate in the wage price index observed over the past two quarters.” Hockman said.
Compensation of employees grew 4.8% over the year, the strongest rate of growth since June quarter 2012.
Over the same period, Australian employment grew by more than 3%, underlining that the increase was largely underpinned by more workers rather than steeper wage increase.
Indeed, real net national disposable income — regarded as a measure of the real living standards for Australians by the ABS — was flat over the quarter and up 1.5% over the year.
However, for individual Australians, it fell by 0.3% in per capita terms over the quarter and was flat over the year.
The household savings ratio — measuring the proportion of income being saved — ticked up fractionally, lifting to 2.7% from 2.5% in the September quarter.
While a small increase, it still sits well below the 10% plus levels seen at the onset of the GFC. For the moment, there is little buffer for households to help boost spending in the absence of a pickup in income growth.
Stephen Walters, Chief Economist at the Australian Institute of Company Directors, described the result as “underwhelming”, pointing out that not only did living standards go backwards in the December quarter, but productivity was also poor.
“Real net disposable national income per capita, the best indicator of national living standards, fell,” he said. “Also, productivity dipped in the quarter, having been unchanged in the previous quarter.”
To Walters, this suggests that for Australia’s economic growth to be sustained, productivity will almost certainly have to improve.
“Absent another boom — and it’s not clear what the genesis of that will be — the next phase of our growth probably will be sourced from much-harder-won gains in productivity growth,” he says.
“These gains usually stem from sustained reform, which has been largely absent of late.”
Gareth Aird, Senior Economist at the Commonwealth Bank, says that means Australia’s politicians will have to get to work.
“Productivity growth is weak. GDP per hour worked, a measure of productivity, actually fell by 0.1% in 2017,” he says.
“Australia appears to be in a low productivity phase.
“We think that data’s today highlights the need for policy reform that can help boost the productive capacity of the economy.
“After all, productivity growth is a necessary condition for long run growth in real wages.”
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