Australian economic growth hasn't been this slow since the GFC

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  • Australia’s economy grew by 1.8% in the year to March, the weakest increase since the GFC.
  • The economy expanded by 0.4% in the first three months of the year, faster than the 0.2% lift in the prior quarter.
  • Solid government demand underpinned the weakness, offsetting very weak growth in household consumption, the largest part of the economy.
  • GDP per person fell marginally, extending Australia’s per capita recession into a third consecutive quarter.
  • Nominal GDP remained strong, helping to boost income revenues for the government.

Australian economic growth hasn’t been this slow since the GFC.

According to the Australian Bureau of Statistics (ABS), the economy grew by 0.4% in March quarter in seasonally adjusted chain volume terms, a result that was in line with market expectations.

The modest result followed a 0.2% increase in the December quarter that was unchanged from the initial estimate.

Despite the modest acceleration in the economy to start the year, growth over the year still slowed to 1.8%, the weakest expansion since the September quarter of 2009, the tail-end of the GFC.

“The Australian economy continues to grow but more slowly than our long term average of 3.5%,” said Bruce Hockman, chief economist at the ABS.

As was the case in the second half of last year, the main source of growth during the March quarter came from solid government demand.

“Government spending was the main contributor to growth, reflecting ongoing delivery of services in disability, health and aged care,” the ABS said.

Government consumption contributed 0.2 percentage points to quarterly growth, the same contribution from international trade. Non-dwelling construction also added 0.1 percentage points.

The big story from the latest national accounts was weakness in household consumption, the largest part of the Australian economy at a little under 60%.

It contributed only 0.1 percentage points to the quarterly increase, impacted by weak income growth and a decreased wealth effect from falling home prices in many parts of the country.

“[This reflected] reduced spending on discretionary goods such as furnishing and household equipment, recreation and culture and hotels, cafes and restaurants,” the ABS said.

This table from the ABS shows the contribution to growth by individual component over the past quarter and year using an expenditure approach to GDP. The column on the right indicates the contribution each component made to the quarterly GDP figure.

ABS

During the March quarter, dwelling investment lopped 0.1 percentage points from growth, the same amount as inventories.

An adjustment to the expenditure measure of GDP helped to offset those pockets of weakness, reflecting that income and production measures of GDP were stronger during the quarter.

Contributing to the weakness in household consumption, Australians saved a greater proportion of their disposable income in the first three months of the year.

The household savings rate ticked up to 2.8%, continuing the modest rebound from the decade-lows in the September quarter last year.

“Household disposable income outpaced subdued growth in household spending,” the ABS said.

Employee compensation also remained soft, growing 1.2% in aggregate during the quarter, or 0.4% per worker on average.

“Today’s data suggests that economic headwinds persist,” said Kaixin Owyong, economist at the National Australia Bank.

“In particular, private sector demand remains weak, subtracting 0.1 percentage points from growth.”

While GDP measured in volumes remained soft, nominal growth remained strong, increasing by 1.4% over the quarter and 4.9% over the year.

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.

Strong nominal GDP growth has helped to improve Australia’s budget position, provide politicians with greater fiscal firepower to support the economy should they choose to deploy it.

Given the economy’s recent performance, it’s arguably needed at this point, especially with strong population growth masking a continued decline in output per person.

While the economy grew at a faster pace in the March quarter than three months earlier, GDP per person continued to go backwards, extending Australia’s per capita recession into a third consecutive quarter

Australia’s per capita recession continues

Per capita GDP fell by a minuscule 0.03% in seasonally adjusted chain volume terms following declines of 0.2% and 0.1% in the prior two quarters.

Over the year, per capita GDP grew by a paltry 0.1%, also the slowest increase since the GFC.

A per capita recession indicates that while the Australian economy has become larger as a whole, the share among individuals has actually become smaller, reflecting weak productivity.

Sluggish productivity has been a feature in Australian since the GFC, a factor that has acted to suppress growth in household incomes and spending, contributing to slowdown in the economy in recent quarters.

That in turn has seen inflationary pressures weaken further, and a lift in unemployment, helping to explain why the RBA cut Australia’s cash rate to a new record low of 1.25% earlier this week.

At 1.8% over the past year, the economy is growing significantly below its potential level, also referred to as ‘trend growth’. Many believe the economy needs to expand by around 2.75% per annum just to keep inflation and unemployment stable.

“The economy is off to a rough start in 2019, and we suspect that things won’t get better anytime soon,” said Ben Udy, economist at Capital Economics.

“Today’s data doesn’t inspire much confidence in the Australian economic outlook.”

Sarah Hunter, chief economist at BIS Oxford Economics, was another to express little confidence about a swift turnaround in the economy anytime soon.

“The data confirms the economy started 2019 very softly,” she said.

“Looking ahead, growth momentum is unlikely to accelerate significantly through the rest of this year. We expect the economy to expand by just 1.7% in 2019, with growth not rising above 2% per annum until early 2020.”

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