- Australian economic growth slowed sharply in the three months to September, driven by a sharp deceleration in household spending.
- Employee pay and disposable income remained weak, leading to households to divert more money away from savings to support spending levels.
- The result means the RBA’s forecast for the economy to grow 3.5% this year is unlikely to be achieved.
Australian economic growth slowed sharply in the three months to September, driven by a deceleration in household spending.
At 0.3%, the increase in real GDP was the weakest since the economy contracted in the September quarter of 2016, seeing growth over the year slow to just 2.8%.
With the RBA forecasting that GDP growth will average 3.5% both this year and next, the result casts doubt over whether the next move in official interest rates is likely to be higher as the bank currently expects.
Make no mistake, this was an underwhelming report card on the economy. Growth was only half the level of that expected by economists.
Here’s a collection of views we’ve received following the report’s release.
Gareth Aird, Commonwealth Bank
Today’s result was underwhelming. Context, however, is key.
It was clearly a weak September quarter from an output perspective. But it’s been a solid few years for the Australian economy.
The expenditure side of the national accounts showed contributions to growth over Q3 came from most of the key components. Consumer spending grew by a tepid 0.3% over the quarter after a strong lift in the June quarter. The pattern over the past few years has been a strong quarter followed by a soft quarter for consumer spending. As such, smoothing out the past two quarters provides a better gauge of the household expenditure pulse. On that basis, spending growth has been respectable over the past six months and annualises out at 2.5%.
Given the choppy nature of household expenditure we are reticent to attribute the weak Q3 result to a negative “wealth effect” from falling property prices in Sydney and Melbourne. On that score, household expenditure in Q4 will be more illuminating.
From a monetary policy perspective, it’s been a miss relative to RBA expectations. But the bigger picture of a gradually tightening labour market and a slow lift in wages growth remains intact. Monetary policy will stay unchanged for foreseeable future.
Su-Lin Ong, RBC Capital Markets
Taking a step back from the vast amount of data contained in the quarterly national accounts and a number of themes emerged.
The stellar pace of near 4% annualised underpinned by resilience in household consumption and residential construction was never likely to continue in our view although we did not anticipate the degree of moderation in Q3.
A weaker residential construction profile.. and an added headwind for the consumer are among our key themes tempering the bright spots in the economy — ongoing public spending, firmer net exports and a continued gentle lift in business investment — these trends were also evident in today’s GDP. The shifting composition of growth will extend next year delivering a moderation in domestic demand with net exports helping to plug some of this hole in activity.
Today’s data continues to suggest that the RBA’s recently upwardly revised GDP forecasts for 2018 and 2019 to 3.5% in both years is optimistic, even taking into account quarterly volatility in the data. Consistent with our base case for 2019, the risk is that employment growth moderates from its recent stellar monthly pace making it difficult to absorb all the excess capacity in the labour market.
The RBA looks set to remain on hold for the foreseeable future.
Bill Evans and Andrew Hanlan, Westpac Bank
The economy lost momentum moving in to the second half of 2018, centred on housing and the consumer against the backdrop of a further tightening of lending standards to the housing sector.
Consumer spending came in below expectations with annual growth slowing to 2.5%. The big downside surprise was around services spend which looks to have dipped in the quarter.
The updates on household incomes were also soft. Labour income posted a decent 1% gain in the quarter but disposable incomes rose just 0.3% overall with weak non-wage income and increased tax payments curbing the gain in nominal terms. In real terms, household disposable incomes dipped 0.1% in the quarter and have shown no growth at all in 2018.
Business investment also took a step lower, led by mining, with the completion of major gas projects.
This result will come as a disappointment to the Reserve Bank. Note that the forecast for GDP growth in 2018 for which appeared in the November Statement on Monetary Policy was 3.5%. 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.
We can expect the RBA 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. Westpac has consistently forecast that the cash rate would remain on hold through 2019 and 2020.
Ben Jarman, JP Morgan
The main area of weakness responsible for the downside surprise was household consumption, which grew a very tepid 0.3% quarter-on-quarter, equal to the lowest level in five years. The annual rate of consumption growth has slowed to 2.5% from over 3%, consistent with our call of a downshift toward 2% annualised.
The saving rate fell from an upwardly revised 2.8% to 2.4%. The lack of downward flexibility in the saving rate from here, particularly in an environment of tightening financial conditions (bank lending criteria, falling dwelling prices, etc.), will be an ongoing challenge to the consumption arithmetic.
For the RBA, today’s numbers certainly take some wind out of the sails, given that the 3% plus growth officials had been trumpeting only a month ago in the Statement on Monetary Policy (SoMP) now is gone. Today’s revisions alone will likely force a downgrade to the staff forecasts for Q4 2018 at the next SoMP, given a quarterly print of well over 1% is now required to hit their existing forecast.
Today’s data also raise concerns about underlying momentum, given that officials have noted the consumer is the area of most uncertainty for the staff’s forecasts. Still, while it is hard to see GDP growth hitting the RBA’s forecast heights in 2019, officials’ level of discomfort with this will be lessened by the fact that unemployment has fallen significantly. Of course, the momentum of the labour market becomes even more important from here.
Paul Dales, Capital Economics
It would be tempting to blame the slowdown in GDP growth in the third quarter on temporary factors, but we believe that the full effects of falling house prices and tighter credit conditions haven’t been felt yet and we expect GDP growth to slow further next year.
Admittedly, the 0.3% drag from inventories probably won’t be repeated. Another positive is that the household saving rate was a higher 2.8% in the second quarter instead of the earlier reported 1.0%. But it’s worrying that it fell further to 2.4% in the third quarter even though consumer spending only rose by 0.3%. That reflects the third quarterly stagnation in real disposable income in as many quarters
The recent slump in crude oil prices will contribute to lower consumer price inflation so real income growth should pick up again. But we don’t expect consumption growth to accelerate as we expect households to increase their savings in response to falling housing wealth.
We expect GDP growth to slow further to 2.5% next year.
Shane Oliver, AMP Capital
The Australian economy continues to grow but its slowed back to a sub-par pace after a brief spurt.
A bottoming in mining investment, improving non-mining investment, strong infrastructure spending and strong export earnings should support growth going forward but are likely to be offset by the downturn in housing construction and house prices weighing on consumer spending. As such growth is likely to be stuck around 2.5-3% over the year ahead.
Given the combination of falling house prices, tightening credit conditions and constrained growth which will keep wages growth weak and inflation below target, we are changing our view on the RBA from being one of rates on hold out to second half of 2020 to now seeing the next move being a rate cut.
However, with the RBA still seeing the next move as being up it will take them a while to change their thinking so we don’t see rates being cut until second half next year. When it does start cutting the RBA will likely stick to 0.25% increments and since rate moves are a bit like cockroaches there is likely to be more than one.
Felicity Emmett, ANZ Bank
While the Q3 GDP result is softer than expected, the underlying near-term momentum in the economy remains solid, with a significant pipeline of public spending, business investment and exports likely to support growth over the next year or so.
Growth is likely to lose some momentum given that housing construction will shortly roll over from being a significant contributor to growth to a drag on the economy. But the key uncertainty around the outlook comes from household consumption in an environment of persistently low wages growth.
The RBA has so far been able to play down the implications of falling house prices, with the view that stronger growth in household income would provide enough support to consumer spending. But with house price weakness intensifying, wages slow to pick up and consumption softening, the outlook may not be so rosy. This suggests that it will still be some time before inflationary pressures lift, keeping the RBA on hold until well into 2020.