- Australia’s economy grew at an annual pace of more than 4% in the first half of the year, but now things look to be turning for the worse.
- According to ANZ Bank’s Stateometer, most states and territories are now growing below average levels with economic activity continuing to decelerate.
- Recent housing market data largely explains the slowdown in the economic activity, casting doubt as to whether the economy will continue to grow at over 3% per annum over the next couple of years as the RBA currently expects.
Australia’s economy grew at an annual pace of more than 4% in the first half of the year, but now things look to be turning for the worse.
Most states and territories are now growing below average levels with economic activity continuing to decelerate.
The housing market is to blame.
That’s the unsettling news to come from ANZ Bank’s latest Stateometer for the September quarter, casting renewed doubt over the ability for the economy to grow at over 3% in the next couple of years as the Reserve Bank of Australia (RBA) is currently forecasting.
“Momentum slowed further in the September quarter across most of Australia,” said Cherelle Murphy and Jack Chambers, members of ANZ’s Australian Economics team.
“All states and territories except Tasmania and the Northern Territory decelerated and recorded growth at below their trend rates.”
For clarity purposes, any state and territory in the top half of the chart is deemed to be growing at an annual pace above its historic trend, while those in the bottom half are growing at below trend pace.
Trend growth is the level where unemployment and inflation is expected to remain stable.
On the bottom axis, anything on the left suggests that economic activity is slowing, while anything on the right indicates it’s accelerating.
Murphy and Chambers say the deceleration in economic activity, including in New South Wales, Victoria and Queensland — Australia’s most populous states — points to the likelihood that official GDP data from the ABS will also show a moderation in activity in the quarters ahead.
“The loss of momentum demonstrated by the Stateometer is consistent with our forecast that the Australian economy will grow at a year-ended pace of 2.9% by the June quarter 2019, down from 3.4% in June this year,” they said.
“The slowing, in our view, brings into doubt the 3.25% year-ended growth rate forecast by the Reserve Bank for June 2019.”
While 2.9% would still be nothing to sneeze at, it would likely see progress in lowering unemployment and boosting wage and inflationary pressures slow in the period ahead.
As for what slowed economic activity last quarter, Murphy and Chambers said there was a common theme across almost all parts of the country.
“Every state, except Tasmania, experienced a drag to momentum from the housing component of the index in the September quarter,” they said.
“The labour market also became less positive for all states and territories except Victoria and the Northern Territory.”
Given that property prices have led changes in employment growth in the past, that result was not all that surprising, and suggests employment growth may slow even further in the period ahead should weakness in the housing market persist.
The vast majority of forecasters believe it will, albeit to differing degrees as to how steep and prolonged the downturn in the housing market will be.
Helping to offset the impact of weaker housing market indicators and softening in labour market data last quarter, Murphy and Chambers said that Australia’s trade exposed sectors were the one bright spot.
“Trade was a highlight with the mining states of Western Australia and Queensland recording stronger positive contributions as resource prices, export volumes and the AUD/USD exchange rate moved in their favour,” they said.
“In New South Wales and Victoria, which are less commodity intensive but have large service sectors, trade momentum also picked up, suggesting a further boost to tourism and education exports.”
So the lower Aussie dollar and still firm demand for commodity exports helped prevent a steeper slowdown in activity, acting as a shock absorber for the economy as it has done in the past. However, given recent concerns over the outlook for the global economy, whether that persists remains an open question.
While that may or may not present a risk, Murphy and Chambers said there were still a lot of positives, other than the lower Aussie dollar, working in the economy’s favour, pointing out that consumer and business confidence is holding up well, private business investment is upbeat with a strong pipeline of commercial and infrastructure work still to come.
However, they countered that optimism by warning that a “tightening of credit market conditions remains a negative factor that together with a poorer outlook for house prices is pulling back demand in this important sector, especially in New South Wales and Victoria”.
The Stateometer is a visual indicator that uses trends across 37 individual economic indicators to measure the performance of Australia’s states and territories over a particular quarter compared to historic trends
ANZ says it’s “correlated with broader quarterly measures of economic activity, such as state final demand, but has not been designed to forecast these series”.
Australia’s Q3 GDP report will be released on Wednesday, December 5.
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