Australian economic growth slows, enters per capita recession

Anna Gowthorpe/PA Images via Getty Images
  • Australian economic growth slowed again in the December quarter, rounding off what was a weak performance for the Australian economy in the second half of last year.
  • Without population growth — a hypothetical scenario — the Australian economy would have fallen into recession.
  • Household spending remained weak, reflecting slower growth in employee pay and a small lift in household savings.
  • Government demand was the main area of strength in the economy late last year.
  • Nominal GDP is growing strongly, helping to boost government revenues. With the household sector clearly struggling, the case for providing some relief to this key area of the economy is strengthening.

Australia’s economy continued to slow in the December quarter. And without population growth, the economy went backwards.

According to the Australian Bureau of Statistics (ABS), the economy grew by 0.2% in seasonally adjusted chain volume terms during the quarter, undershooting forecasts for an increase of 0.3%.

Growth in the September quarter, originally reported at 0.3%, was left unchanged.

With the economy decelerating sharply in the second half of the year, growth over the year slowed to 2.3%, below the 2.5% level expected.

That was also well below the 2.8% year-ended pace forecast by the RBA just a month ago.

It also sits below the 2.75% level where many expect inflation and unemployment will remain stable, casting renewed doubt over the bank’s economic forecasts, especially should recent trends continue.

“Growth in the economy was subdued, reflecting soft household spending and a decline in dwelling investment. The approvals for dwelling construction indicate that the decline in dwelling investment will continue,” said Bruce Hockman, Chief Economist at the ABS, referring to the quarterly result.

The ABS said household spending grew by 0.4% over the quarter, “reflecting a continuation of modest spending in recent quarters”.

This is the largest part of the Australian economy at around 55%. During the December quarter, household spending added 0.2 percentage points (ppts) to economic growth, another weak result that was largely driven by weak spending at the shops.

This table from the ABS shows the breakdown of how other parts of the economy fared over both the quarter and year from a GDP expenditure method. The column on the right indicates the contribution each component made to the quarterly GDP figure.

ABS

Helping to explain why consumer spending remains sluggish, growth in employee pay eased while saving levels increased marginally.

“Compensation of Employee (COE) increased 0.9% in December quarter due to strength from both the private and public sector,” the ABS said.

“Through the year COE increased 4.3% and with growth above its five year December average of 3.4% growth.”

With total employment growth over the year lifting by 2.2%, total per capita employee compensation rose by just over 2%.

For the first time in a long time, households also saved more of their disposable income with the household saving ratio lifting to 2.5%, up marginally from the decade-low level of 2.3% reported a quarter earlier.

The lift in the household savings rate will add to evidence that falling home prices is changing consumer behaviour.

Outside of the household spending, inventories also contributed 0.2ppts to quarterly growth, offsetting declines of 0.2ppts and 0.1ppts from private sector investment linked to housing, along with a smaller-than-expected 0.1ppts negative contribution from net trade.

The statistical discrepancy adjusts the expenditure measure of GDP to the average of the income and production measures.

So all in all, it was a pretty soft result from the private sector.

However, as has been a feature of recent national accounts, government demand provided a more than adequate offset.

“Public demand sustained growth in the quarter,” the ABS said.

“Public investment remained at high levels with State and Local government growth of 6.3% reflecting continued work on a number of large infrastructure projects.

“Government final consumption expenditure grew 1.8%, with ongoing expenditure in health, aged care and disability services. This investment translates to ongoing strength from the healthcare industry, which remains the largest contributor to economic growth.”

All up, government demand added 0.3ppts to quarterly growth, more than total growth during the quarter.

If that result wasn’t enough for the pessimists, the next statistic may do the trick. Had it not been for population growth, Australia’s economy would have fallen into recession, in hypothetical terms, at least.

With Australian population growth running around 0.4% per quarter, and real GDP growing by 0.2%, per capita GDP went backwards during the quarter, falling 0.2%.

Combined with a 0.1% decline in the prior quarter, that means Australia has officially entered a per capita recession.

That means that while the Australian economy has become larger as a whole, the share among individuals has actually become smaller.

It implies that productivity per person has declined. Sluggish productivity has been a feature in Australian since the GFC, a factor that has suppressed growth in household incomes, contributing to weak inflationary pressures and helping to explain why Australia’s cash rate sits at just 1.5%.

Australia is not the only advanced economy that is currently struggling to overcome weak productivity growth.

A per capita recession has not been seen in Australia since the mid-2000s. Until today, that is.

So another unwelcome result, but help may soon be at hand.

While GDP measured in volumes continued to slow, and in per capita terms went backwards, in nominal terms growth was strong.

Nominal growth measures changes in both volumes and prices over a given period, and is the broadest measure of income in the economy. That means its effectively the tax base, too.

It also reflects the world we live in.

In the December quarter, nominal GDP jumped by 1.2% — the fastest increase in a year — leaving the change on a year earlier at 5.5%, up from 5.1% in the year to September.

Stronger nominal GDP growth has helped Australia’s budget position improve in recent years, and will provide politicians with some fiscal firepower to support the economy, should they choose to deploy it.

Given the recent trends in household spending and employee pay, one could argue that households could lead a little help in early 2019.

“Is it sufficient or even desirable to simply muddle along or does the economy require greater stimulus?,” asks Callam Pickering, APAC Economist at global jobs specialists Indeed.

“Focus has naturally turned to the Reserve Bank and whether they might cut rates. But does the economy need stronger fiscal policy and a more coordinated approach to right the ship?

“With an election mere months away, fiscal policy requires greater attention. The RBA cannot do it alone.”

With Australia’s budget position in far better shape than on previous years, and with the RBA cash rate already sitting at the lowest level on record, Pickering has a point on the role that government should play to help ensure this downturn doesn’t turn into something more sinister.

Aiming for a budget surplus by potentially tipping the economy into a recession will bot make for smart policy. It would almost inevitably mean any surplus that is delivered won’t remain for long.

However, like Pickering, other analysts believe the RBA may soon be joining the fight to get the economy back on a stronger footing.

“We believe the RBA will be increasingly uncomfortable with the growing tension between strong labour market data and softer GDP data as the weakness in household spending appears to be more persistent than it forecast,” said Kaixin Owyong, Economist at the National Australia Bank.

“Should the progress in the labour market falter over the next few months, the Bank will likely be forced to cut rates to support households.

“NAB’s forecast is for no change to the cash rate in the foreseeable future, although we do see significant risk of a cut, a risk which has risen with these weak data.”

While the NAB still has rates on hold, the market probability of a 25 basis point rate cut this year has increased following the release of the GDP report.

There’s also a small yet growing probability of a second cut arriving by the middle of next year.

Whether that eventuates will likely be determined by what happens in the jobs market. Right now, the strength there contrasts to broader trends in the economy seen in the second half of last year.

It is regarded by most to be a lagging economic indicator, and if unemployment starts to lift as a courtesy of the recent slowdown, the RBA will likely be forced to act.

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