International trade won't be coming to the rescue for Australian GDP

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  • International trade will detract 0.2 percentage points from Australian Q4 GDP, all but ensuring a weak result will arrive when the national accounts are released on Wednesday.
  • Australia’s current account deficit narrowed sharply, thanks largely to a big increase in the trade surplus.
  • Government demand is expected to add 0.3 percentage points to Q4 GDP, helping to offset the impact of trade.
  • Even with the help of government spending and investment, quarterly GDP looks set to be weak, continuing the deceleration seen in Q3.

International trade will not be coming to the rescue for Australian economic growth in the December quarter of last year.

According to the Australian Bureau of Statistics (ABS), net exports will detract 0.2 percentage points from Australian Q4 GDP, increasing the risk of a flat outcome or, potentially, a negative quarterly print.

Markets had been expecting net exports to only detract 0.1 percentage points from growth.

According to the ABS, while the dollar value exports rose by $3.676 billion during the quarter, faster than imports at $1.015 billion, that reflected the impact of price movements, masking that export volumes fell by 0.9% while import volumes were near-static.

“In volume terms, falling exports and rising imports resulted in an expectation for international trade to detract 0.2 percentage points from growth in the December quarter,” the ABS said.

While net exports came in below market expectations, Australia’s current account balance narrowed during the quarter, declining to $7.2 billion after seasonal adjustments, down from $10.8 billion in Q3.

“[This was] driven mainly by increased goods and services exports,” the ABS said.

Australia’s goods and services surplus swelled to $8.425 billion in Q4, up $2.661 billion on the level reported in the prior quarter. That increase reflected that the dollar value of exports grew faster than imports in Q4.

Helping to explain the lift in the trade surplus, Australia’s terms of trade rose by 3.2% for the quarter, leaving it up 6% over the year.

Terms of trade measures the value of a nations exports divided by imports.

The net primary income deficit also narrowed $848 million to $15.318 billion after seasonal adjustments, helping to narrow the current account deficit.

The primary income account measures income flows between residents and non-residents over the quarter.

However, while trade will detract from Q4 growth, government demand will provide an offset courtesy of a lift in consumption expenditure.

According to the ABS, government expenditure rose by 1.8% over the quarter, an outcome that is expected to add 0.3 percentage points to quarterly growth when measured from an expenditure approach.

Without taking into asset transfers during the quarter, government investment grew by only 0.3%, and will make no contribution to economic growth.

“The upside in government spending offsets downside surprises on inventories and net exports,” said Westpac’s economics team.

Following the release of other partial GDP inputs in recent days, many economists have already scaled back their forecasts for quarterly growth, predicting an outcome of 0.4% or lower.

“We expect a soft print of 0.2% in the quarter,” says Michael Blythe, Chief Economist at the Commonwealth Bank, adding that result, without revisions to prior data, would see year-ended growth slow to a below-trend pace of 2.4%.

Westpac’s economics team are also forecasting an identical result to the CBA.

However, while GDP measured in volumes appears set to be very weak, or going backwards in per-capita terms, Blythe says the nominal side of the economy will likely present a far stronger picture.

“The nominal economy should fare better,” he says.

“Nominal GDP, or income, should rise by 1.3% in the quarter and 5.7% over the year. Rising income will help improve the budget balance and should allow some stronger spending to come through in 2019.”

Potential tax cuts and additional government investment in the federal budget, in other words.

Australia’s Q4 GDP report will be released on March 6, including the last and largest of the unknowns in the national accounts, household consumption expenditure.

Australia’s federal budget will be delivered in April ahead of the election, likely in the middle of May.

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