- The Australian economy grew at a sluggish pace of 2.3% last year.
- Household spending surged in the December quarter, helped by strong growth in employment.
- Many economists think that’s unlikely to last, making it harder for the economic growth to accelerate as the RBA is currently forecasting.
Australian economic growth, at least compared to prior periods, remains fairly sluggish at present.
According to the Australian Bureau of Statistics (ABS), real GDP grew by 0.4% in the December quarter of last year, seeing the increase on a year earlier decelerate to 2.4%, below the economy’s potential trend growth rate or around 2.75%.
Compared to 2016, economic growth stuttered along at 2.3%.
However, as is often the case in the National Accounts, there was both good and bad news in the report.
For the optimists, household spending accelerated sharply, lifting by 1% over the quarter — the largest increase in over a year — helped by an even larger increase in employee wages which grew by 1.1%.
Even if the latter largely reflected a strong increase in employment growth, rather than acceleration in wage growth for individuals, it was undoubtedly good news.
Others will also point out that the modest increase in GDP was also driven by weakness in exports, masking stronger trends in the domestic economy.
However, for the pessimists, there was also plenty to focus on.
For one, real GDP in per capita terms was flat, meaning that for the individual, output was unchanged from three months earlier.
And Real net disposable national income per capita — regarded as a measure of living standards — went backwards over the quarter, leaving it flat over the year.
Reflecting poor productivity, GDP per hour worked also fell over the year.
And while household consumption helped to boost overall economic activity late last year, household savings — while slightly higher than a quarter earlier — still held at very low levels. That outcome will make it harder to sustain or lift spending levels in the period ahead without an acceleration in income levels.
Now that they’ve had time to digest the report, it’s time to see what economists have made of it all.
Was the underlying result strong or weak, or something in between? And does it have any implications for interest rates?
Here’s what they’ve been saying in the notes we’ve received so far.
Gareth Aird, Commonwealth Bank
From a growth perspective, the Australian economy closed out 2017 in a lukewarm fashion.
One of the defining features of the Australian economy over 2017 was strong growth in jobs. Employment rose by 2.2% in 2017. This would normally point to output growth of around 3%. But today’s data indicates that the Australian economy only grew by 2.3% in 2017. The implication is that productivity growth is weak. GDP per hour worked, a measure of productivity, actually fell by 0.1% in 2017. This should improve a little over 2018 as a big lift in LNG production boosts productivity in the resources sector. Notwithstanding, Australia appears to be in a low productivity phase. A lift in some public transport infrastructure will help at the margin but 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. At present, real wages are currently flat in Australia.
The Q4 GDP outcome was lower than the latest RBA forecasts. But Governor Lowe earlier today stated that although the economy was likely to have ended 2017 a little softer than previously thought, it does not change the RBA’s assessment of the outlook. As a result, we don’t think that the policy dial has shifted on today’s data. Rates will stay on hold until wages growth and core inflation are on a sustained upward trend. That still looks to be some way off so the cash rate should stay anchored at a record low for most of the year.
Shane Oliver, AMP Capital
Annual GDP growth in 2017 averaged out at 2.3%, the lowest annual rate since 2013 and less than would be expected given a strong labour market where employment was up by 3.3% over the year. This can be explained by a decline in productivity which was down by 0.8% over the year.
GDP growth ended 2017 close to the RBA’s forecasts of 2.5% but the central bank still expects growth to average at around 3% in 2018 which may be challenging because of the poor outlook for consumer spending and a slowing in housing construction. And while non-mining business investment is rising, public infrastructure spending is surging and the labour market is strong, there are few signs of significant cost pressures as the economy is running below its capacity.
Our view is that the Australian economy will strengthen somewhat in 2018 as business conditions are still very positive which will work through the spare capacity in the economy and eventually lift inflation. But that process will take some time.
We see the RBA starting to lift the cash rate at the end of this year, but the risk is that the first rate hike for this cycle won’t happen until sometime in 2019.
Felicity Emmett, ANZ Bank
The result highlights the still patchy nature of growth and the subdued nature of inflationary pressures in the economy.
For policymakers, the GDP number is likely to be a little disappointing given growth in the second half of 2017 has stepped down to 2.1% from 2.7% in the first half of the year.
While the pick-up in consumption is reassuring, it needs to be considered in the light of the ongoing downtrend in the saving rate. We would point out, however, that the soft tone to GDP is at odds with the strength in business conditions and the labour market.
We are reluctant at this stage to extrapolate the weakness into 2018, and continue to expect a strengthening of growth this year. The weakness in wage growth confirms that the RBA is likely to be on hold for some time yet.
Paul Dales, Capital Economics
Looking ahead, the outlook for business investment is better than these data suggest as mining investment won’t continue to fall as rapidly. And the rises in the various measure of wage and income growth will go some way to supporting consumption growth. The annual growth rate of compensation of employees rose from 3.1% to a five-and-a-half year high of 4.8% and the growth rates of compensation per employee, earnings per hour and real disposable income all climbed closer to 2.0%.
But real income growth of 1.5-2.0% can’t sustain the 2.9% annual rise in consumption. This is especially the case when the stagnation in house prices means households will be less willing and less able to compensate by borrowing more or saving less. Although the saving rate rose from 2.5% to 2.7% in the fourth quarter, it has already declined from over 10% in 2008.
Our forecast that still-subdued income growth and a weak housing market will prompt consumption growth to slow to 2.0% later this year is the main reason why we believe GDP growth this year will fall short of most people’s expectations.
Ben Jarman, JP Morgan
We remain concerned by the saving rate. [It] has now fallen nearly 7 percentage points from its financial crisis-period peak in 2008. This has been very supportive for consumption growth in recent years, and so without further downward adjustment in the saving rate, 2017’s very strong rate of labour force growth would have to be maintained, otherwise consumption will decelerate.
Even with the stronger investment and export outcomes we expect, the consumer is a significant constraint to GDP growth moving back up above 3% in the near-term, per the RBA’s forecasts. The staff projected 3.25% year-on-year growth by the end of 2018 in the February SoMP, though the Governor’s language in the last couple of days reflects some back-pedalling from this.
Another set of downward revisions in the next forecast round in May would underscore the fact that the RBA will lag the global rate normalisation process by some distance.
Bill Evans, Westpac
The detail of this update will provide policy makers with some comfort. Consumer spending growth at close to 3.0% suggests that the economic expansion is more broadly based than previously assessed. Although the scope of revisions to consumer spending raises some questions about the reliability of these estimates, it seems a little at odds with some other indicators, such as the retail trade survey.
Going forward, the household sector remains vulnerable at a time of relatively weak wages growth and high debt levels. The price / wage dynamic remains — as it was with core inflation — below the [RBA’s inflation target] band and private sector wages growth remains relatively weak.
We also note that consumer spending, at 2.9%, is still a little below the long-run average and is not a pace that would typically lead to a build-up in inflation pressures.
Riki Polygenis, National Australia Bank
Australia recorded subdued economic growth in Q4, with the detail painting a mixed picture.
On the upside, net exports should bounce back and the decline in business investment is not as troubling as it initially appears. Household consumption was particularly strong, although we question whether this pace can be sustained. Measures of wages were again weak, despite strong employment, as was labour productivity, both elements of the growth outlook which we would like to see improve.
The data doesn’t change our view that economic growth will pick up to around 3% by the end of 2018 on the back of LNG exports, business and government investment.
While this is good news, there is little to imply a sustained pickup in consumer spending and inflation.
The RBA will remain on the sidelines for now.