Why Australian GDP growth may not be as weak as many forecasters believe

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  • J.P. Morgan has downgraded in Q4 Australian GDP forecasts, mirroring many other economists in recent days.
  • While the bank says business indicators for the December quarter were “less favourable than expected for GDP”, it says they provide clues that Australia’s remaining GDP indicators may not be as weak as many suspect.
  • Australia’s Q4 GDP report will be released on Wednesday, March 6.

Like many economists before him, Ben Jarman of J.P. Morgan expects Australian economic growth remained sluggish in late 2018, continuing the trend seen in the September quarter.

Following the release of Australia’s latest business indicators today, Jarman now sees GDP increasing by just 0.4% in the December quarter, down from his original forecast of 0.6% growth.

“Australia’s business indicators… were less favourable than expected for GDP on the headline measures,” he said.

“Inventories were down 0.2% for the quarter which equates to a neutral contribution to GDP growth, against our expectation of a 0.3 percentage point addition.

“We are now tracking 0.4% quarter-on-quarter (QQ) for Wednesday’s GDP reading, having had 0.6% with a bit of downside risk before today’s numbers.”

However, while Jarman has revised down his quarterly growth forecasts, he is reluctant to get even more pessimistic at this point, noting there were some clues in today’s data that suggest some Australia’s remaining GDP inputs — net exports and household consumption, the latter being the largest part of the economy at over 50% — may not be as weak as some expect.

“The headline for inventories was dragged by mining (-2.8% QQ), manufacturing (-0.8% QQ), and utilities (-0.6% QQ),” he says.

“This suggests some possible offset in consumption, particularly non-retail spending, and in the net-trade contributions, given the combination of decent national income gains and reduced inventories means private demand shouldn’t be too soft.”

So the expected drag from international trade on growth during the quarter, along with forecasts for tepid consumer spending, may not be as bad as some currently expect.

Jarman says income measures in the economy also point to a GDP growth that may exceed some of the more pessimistic forecasts currently out there.

“With [company] profits now up 10% on the year, and wages posting a decent gain on the quarter of [0.8% and 4.1% over the year], the income-based measures are looking quite healthy,” he says.

“Were this income growth not to be deployed, we would expect a rise in the saving rate or its expenditure-side analogue, inventories, so the absence of the latter is supportive for the remaining GDP partials.”

Q4 net exports and government demand figures will arrive on Tuesday, March 5, one day before the national accounts will be released.

Household consumption expenditure — the largest component in Australian GDP — won’t be revealed until the GDP report is released.

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