Australia’s latest economic report card has just been released, delivering a mixed picture on the health of the Australian economy in the September quarter of this year.
Headline GDP grew by 0.6% in seasonally adjusted chain volume terms, below the upwardly-revised 1% increase of the June quarter and forecasts for an expansion of 0.7%.
Despite the small quarterly miss, the annual growth rate rocketed higher, jumping from 1.9% to 2.8% courtesy of the low base effect created by the 0.3% decline in GDP reported in the same quarter a year earlier.
The economy is now growing at its trend pace, and largely in line with the Reserve Bank of Australia’s (RBA) forecasts.
However, while on the surface that’s good news, as the GDP report often does, the September quarter report has created more than a few talking points, especially when it comes to the household sector.
Household consumption, the largest part of the Australian economy, grew by a paltry 0.1%, the weakest level since the onset of the global financial crisis back in late 2008.
That result, far weaker than most expected, came despite an improvement in employee compensation with households choosing to save a little more rather than lift their spending levels.
However, masked somewhat by the soft household consumption result, private investment was strong over the quarter with non-dwelling construction and spending on machinery and equipment both adding to quarterly growth.
Just like recent business and consumer confidence surveys, there was a wide gulf between the performance of Australia’s business sectors last quarter, raising understandable questions as to what will happen next.
Will the improvement in the business sector lead a recovery for households, or will weakness in the latter challenge the outlook for investment? Or will they converge somewhere near the middle?
Financial markets have had their say, reacting to the weakness in the household sector by selling down the Aussie dollar and buying government bond futures.
It’s not been a major move by any stretch, but it suggests there’s a degree of unease towards the result.
Now that the markets have digested the report, it’s time to see what the economists have made of it, and what potential implications it may have on the outlook for employment, growth and interest rates.
Here are the responses we’ve received so far.
Shane Oliver, AMP Capital
GDP growth is on track to lift towards 3% in 2018 which would be in line with the Reserve Bank’s forecasts. There are clear growth drivers emerging — the mining investment downturn is nearly complete, non-mining business investment is lifting and public infrastructure spending is surging thanks to elevated state budget surpluses, asset sales and the Federal Government’s commitment to boost infrastructure projects. Net export growth should remain solid thanks to strong global growth and the completion of resource projects. These drivers should be sufficient to offset slowing housing construction and weak consumer spending. However, the risks around consumer spending need to be watched closely.
We have flagged the risks to the consumer for some time and the drags from low wages growth, slowing wealth accumulation, poor sentiment, high debt levels and rising energy costs remain. Over recent periods, wages growth has remained low but consumers have dipped into their savings to increase consumption. Solid gains in wealth from strong home price growth in Sydney and Melbourne gave households the confidence to run down their savings rate but the savings rate has now fallen to 3.2% from nearly 8% three years ago and it’s doubtful that households will want to keep running it down as house price gains in Sydney and Melbourne fade. As such consumer spending growth is likely to remain constrained going forward.
So far, moderate GDP growth has not been enough to produce the desired pick-up in inflation or wages growth. Numerous businesses are under pressure to keep costs competitive particularly in the retail, food, insurance and communications areas. High levels of underemployment are continuing to weigh on wages growth and various business surveys indicate that labour costs are still expected to remain low, so wages growth is expected to stay subdued for a while yet. While the price and wage outlook remains subdued and the risks remain significant around the consumer, it is difficult to see a near-term RBA rate hike. So we remain of the view that the RBA won’t start raising interest rates until late next year at the earliest.
Sally Auld, JP Morgan
Compositionally, today’s print is not a good number. Outside of private investment, most components were soft, especially consumption.
The most worrying aspect of the data was the strikingly weak household consumption outcome. Interestingly, the household savings ratio rose 0.2% percentage points to 3.2%, suggesting that at least in the most recent quarter, households have been reluctant to run down savings to fund consumption. This stands in the face of the RBA’s latest forecast set, which assumes a pick-up in consumption funded in part by a decline in the savings rate. It is probably too early to say that this is the beginning of a new trend, but given the unsavoury mix of headwinds facing the consumer at present, alarm bells should be ringing. In any case, consumption is around 55% of GDP, so trend or better growth will not be achievable in 2018 if the consumer has truly stepped down a gear.
The more positive aspects of the Q3 GDP print are to be found in a better geographic dispersion of growth, with a much improved outcome in Western Australia. Also, compensation of employees –a broader measure of labour incomes — lifted 1.2% in the quarter, consistent with a rise in hours worked in the three months to September. This should go some way to easing any anxiety at the central bank around the soft 3Q17 wage price index number.
For the RBA, there are some positives in today’s number. But it will be worried by the weakness in consumption, especially in a quarter in which labour incomes growth was robust. Consumers appear to have used some of the lift in incomes growth to rebuild savings, an outcome not so surprising for a sector with such high levels of leverage. If this process continues into 2018, then trend or better growth outcomes will become increasingly difficult to achieve.
Michael Workman, Commonwealth Bank
The economy expanded by 2.8% over the year to September 2017. It is broadly in line with our estimate of potential GDP growth of 2.75%. So the economy is travelling relatively well in an overall activity sense. But it doesn’t feel like it. Mainly because household disposable income growth is poor, thanks to unusually weak wages growth. Household spending rose by a weak 0.1% in Q3, at a very modest annual pace of 2.2%. The household savings ratio of 3.2% in Q3 was well down from last year’s 4.9%. It indicates how households are financing their spending in a period of weak wages and income growth.
Over the coming year we expect annual GDP growth to be around 3% per annum, with positive contributions from public and non mining investment (buildings and engineering), household spending and net exports. We expect to see a construction rotation occur over the next few years, with stronger non residential and infrastructure construction offsetting weaker new residential activity. The public sector will add to growth over the next few years. Large scale Federal and State Government infrastructure plans, mainly transport related, are expected to build towards a peak in early 2019.
Callam Pickering, Indeed
The result was almost entirely driven by investment, with consumption posting its weakest result in almost nine years.
Wage growth, or the lack of it, remains the key here. Households aren’t spending because budgets are tight. Household consumption per capita has increased by just 0.8 per cent, on average, over the past decade. We’ve never seen numbers so persistently weak since the ABS data began in 1960. High levels of household debt – largely reflecting property – doesn’t help either.
Nevertheless, there is some cause for optimism going forward. Employment growth has been strong throughout 2017 and that normally leads to stronger consumption growth in the future. Improved business conditions should, in time, lead to an improvement in wage growth.
Investment represented the best news story in the GDP figures. Investment – namely mining investment – has driven much of the softness in the Australian economy over the past five years. This is beginning to turn around as stronger business conditions encourage businesses to expand and invest. Business investment rose by 8.6 per cent in the September quarter and engineering construction investment rose by 6.3 per cent.
Private residential investment fell for the third consecutive quarter, which indicates that the residential construction boom is now well past its peak. Construction activity should remain quite elevated over the next year but it is still likely to subtract from growth going forward.
With the headline figure consistent with the RBA’s official forecasts we do not think this report will impact the RBA’s thought process. They have settled on a period of stable interest rates and it will require a big change, in either direction, for them to make a policy move next year. Nevertheless, there would be concern about conditions in the household sector since without a strong household sector you rarely have a strong economy.
Paul Dales, Capital Economics
The performance of the economy in 2018 will largely come down to whether stronger business investment can continue to compensate for weaker dwellings investment and consumption, as it did in the third quarter.
The softer housing market contributed to the weak 0.1% quarterly gain in consumption, which was the smallest rise in five years. But the bigger constraint on spending remains soft income growth. Nominal incomes did rise by 0.5% q/q and compensation of employees was up by 1.2% q/q and 3.0% y/y. But real income growth remained weak and the first rise in the saving rate in over a year to 3.2% from 3.0% shows that the willingness of households to spend is fading.
Indeed, consumption growth was held back by a 1.0% q/q fall in health, a 0.9% q/q drop in hotels, cafes and restaurants, a 0.8% q/q decline in furnishings and household equipment and a 0.6% drop in recreation and culture. They are all areas where households tend to pull back when times are a bit tough. In contrast, and despite the price hikes, the 1.4% q/q rise shows that households used more electricity, gas and petrol. They also ate and drank more at home as spending on food rose by 1.0% q/q.
Overall, these data provide more evidence that the economy is successfully moving on from the mining boom and bust. We expect that to continue next year. But the combination of a weaker housing market and continued weak income growth explains why we believe GDP growth will be 2.5% next year rather than 3.0% as the RBA has forecast. In our view, that will contribute to the RBA leaving interest rates at 1.5% for all of next year.
David Plank, ANZ Bank
Household consumption growth was very soft, with the 0.1% quarterly gain the weakest since 2008. On a more encouraging note, compensation of employees was up 1.2% to be up 3% year-on-year. The strength of income meant the household saving rate ticked up in the quarter. The result highlights the disparate influences on the economy at present, with household spending under pressure but investment strong. We are encouraged by the rise in wages, but it needs to be backed up by the Wage Price Index to impact on RBA policy expectations for 2018.
Non-dwelling investment was the biggest contributor to growth, with both public and private sector rising. Underlying business investment was up 2% and has risen for four quarters in a row. Government investment, ex-transfers, was up 5%, highlighting the strength of infrastructure spending.
For policymakers, there might be some encouragement with the lift in income and the somewhat higher household savings rate. This highlights that the economy can grow around trend even if the household sector is contributing little so long as investment side remains strong. And the forward indicators suggest investment will remain solid. But growth is still patchy, with household consumption particular weak. We think further confirmation will be needed that the tighter labour market is translating into higher wages before the RBA will be confident enough to lift the cash rate from its record low.