- Australia’s economy slowed sharply in the September quarter, growing at the weakest pace in two years.
- Household consumption growth– the largest part of the economy at over 50% — was weak, driven by soft spending on discretionary items. That was partially offset by strong government investment.
- Employee pay growth remained subdued, leading households to divert more money away from savings to sustain spending levels.
- The economy grew by 2.8% over the year, down from 3.1% in the prior 12 months, casting doubt over the RBA’s optimistic forecasts for lower unemployment and stronger inflation in the years ahead.
- The RBA has been talking about the likelihood of the next move in official interest rates being higher. Today’s report may temper that view.
Australian economic growth slowed in the September quarter, driven largely by a slowdown in household spending.
According to the Australian Bureau of Statistics, GDP grew by 0.3% in seasonally adjusted chain volume terms, missing forecasts for an increase of 0.6%.
For context, that is an unusually large miss on economists’ expectations, particularly for this data set.
It was the weakest quarterly expansion since the economy contracted in the September quarter of 2016. The economy grew by 0.9% in the prior quarter, unchanged from the previous estimate.
The quarterly miss saw GDP growth over the year slow sharply to 2.8%, well below the 3.3% pace expected.
That outcome will not please the RBA which is forecasting GDP growth to average 3.5% both this year and next. The result casts doubt on the outlook for lower unemployment and higher inflation over this period as the bank current anticipates.
Bill Evans, chief economist at Westpac Bank, says it will take a near-miracle in the December quarter for the economy to grow by 3.5% this year as the RBA is forecasting.
“With the first three quarters of the year totalling 2.2%, the December quarter would have to print growth of 1.3%, a highly unlikely event,” he says.
“We can expect the Bank to lower its forecast for GDP growth in 2018 from 3.5% to 3.0% when it next releases its forecasts on February 9 2019.”
Growth in the year to June, originally reported at 3.4%, was also revised down to show a smaller increase of 3.1%.
“The household sector drove domestic growth with increased consumption supported by moderate rises in household income,” said Bruce Hockman, Chief Economist at the ABS.
“Household consumption rose 0.3%, driven by non-discretionary spending on food and housing. Spending on discretionary items slowed during the quarter.”
Over the quarter, household consumption — the largest part of the economy — grew by 0.3%, contributing 0.2 percentage points (ppts) to real GDP.
The modest increase in spending was helped by modest growth in employee pay and a further decline in the household savings ratio.
Compensation of employees (COE) grew by 1%, driven by strength in the private sector. Over the year, CoE grew by 4.3%, continuing to decelerate from the levels seen earlier in the year.
This figure includes not only wage growth but also changes in employment and hours worked, so it is an aggregate measure and not reflective of growth in the pay packets of individuals.
“Labour income posted a decent 1% gain in the quarter but disposable incomes rose just 0.3% overall,” said Andrew Hanlan, Senior Economist at Westpac Bank.
With pay growth remaining subdued, households continue to divert more disposable income away from savings in order to sustain spending levels.
The household savings ratio declined to 2.4%, the lowest level since the GFC.
“The ratio fell as household consumption continued to outpace growth in household gross disposable income,” the ABS said.
“Weak growth in gross disposable income was due to moderate growth in compensation of employees being partially offset by a fall in gross mixed income and a rise in household income tax payable.”
In what was another disappointing outcome, real net national disposable income per capita also fell during the quarter, declining by 0.3%, the largest decline since the June quarter of 2017.
Following a flat outcome in the prior quarter, that saw annual growth in this measure of living standards slow to 1.3%, down from 1.8% in the year to June.
Helping to offset the impact of slower household consumption last quarter, the ABS said government consumption and investment both increased strongly during the quarter.
“Public spending was funded through increased revenue,” it said.
“General government final consumption expenditure increased 0.5%, underpinned by continued expenditure in health, aged care and disability services.
“Public investment remained at high levels with continued work on a number of large infrastructure projects around the nation.”
Public investment added 0.2ppts to GDP, while consumption chipped in with an increase of 0.1ppts.
Elsewhere, non-residential construction fell sharply, declining 3.8%. That lopped 0.2ppts of the quarterly growth figure. Inventories also dragged on the result, detracting 0.3ppts from growth.
Dwelling investment, business investment and net trade provided some support, adding 0.1ppts, 0.1ppts and 0.3ppts to real GDP over the quarter.
With Australia’s population growing faster than GDP during the quarter, real GDP per capita contracted by 0.1%, the first decline reported in two years.
Including price movements over the quarter, nominal GDP grew faster than the increase in volume-measured real GDP, lifting by 1%, the same pace seen in the June quarter.
From a year earlier, nominal GDP grew by 5.2%, the fastest increase in a year.
Nominal GDP is the broadest measure of income in the economy, and helps explain the improvement in the federal budget seen in recent years, helped by firmer company profits, an increase in the price of Australia’s key commodity exports and modest growth in household incomes.
Paul Dales, Chief Australia and New Zealand economist at Capital Economics, said September result “sets the tone for 2019”.
“The 3.8% drop in non-dwelling construction is disconcerting as it marked the second fall in as many quarters. And it is worrying that the household saving rate fell to a 10-year low of 2.5% even though consumer spending only rose by 0.3%,” he said in response to the report.
“Even if GDP growth rebounds to 0.6% in the fourth quarter, it would only increase by 2.9% this year — much weaker than the RBA’s forecast of a 3.5% increase.”
Given the downturn in the housing market, Dales expects economic growth in 2019 will slow to 2.5%.
“We believe that the full effects of falling house prices and tighter credit conditions have yet to be felt,” he says.
Like Dales, Bill Evans at Westpac is also expecting a growth slowdown to arrive next year, forecasting the economy will grow by 2.7%, the level where many believe Australian employment and inflation will remain steady.
“Today’s print is likely to change the RBA’s growth rhetoric of strongly above trend to slightly above trend drifting back to trend in 2019,” he says.
“Westpac has consistently forecast that the cash rate would remain on hold through 2019 and 2020.
“If we are right that the RBA will revise down its growth forecasts on the basis of this result… it may also temper the bank’s attitude to [the outlook for interest] rates in 2020 as well.”
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