Australian economic growth looks set to slow even further

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  • Three of Australia’s big four banks are forecasting that Australian GDP grew by just 0.2% in the December quarter last year. Many other forecasters are predicting a similar outcome.
  • Such a result would be far slower than the downgraded 0.6% pace forecast by the RBA just a month ago.
  • Australia may be about to record its first per capita recession in close to two decades.
  • While that would be a weak result, the nominal side of the economy looks like it fared significantly better. That could mean additional tax relief of increased government investment ahead.

After growing by just 0.3% in the September quarter of last year, it now looks like the Australian economy slowed even further late last year.

Following the release of the last Q4 GDP partials on Tuesday, three of Australia’s big four banks — the Commonwealth, Westpac and ANZ — are all forecasting that the economy likely expanded by just 0.2%, an outcome that will see growth over the year slow to 2.4% without any revisions to prior data.

The odd forecaster out is the National Australia Bank (NAB) who is forecasting a slightly faster 0.3% increase in GDP growth for the quarter.

Such an outcome –be it 0.2% or 0.3% — would be a concern for the Reserve Bank of Australia (RBA) who are banking upon strong, above-trend growth, to help gradually lower unemployment and gradually lift inflation in the coming years.

Australia’s trend growth rate is the level where the economy grows fast enough to keep unemployment and inflationary pressures steady.

Many regard this level to be around 2.75% per year in Australia, meaning a 2.4% result in the year to December would likely lead to weaker inflation and higher unemployment, especially if sustained.

They just happen to be the two domestic triggers the RBA nominated that could warrant further rate cuts.

Only a month ago, the RBA forecast that GDP would grow by 0.6% in the December quarter, keeping year-ended growth just above trend. Such a scenario now appears highly unlikely.

However, at this point, it still sees the Australian economy growing by around 3% this year.

“The RBA will be firmly focused on the household spending data in the GDP report,” says ANZ Australian economics team.

“The RBA was surprised by the combination of downward revisions to past data and weakness in the Q3 report. If, as we expect, this weakness continued into Q4, the RBA may need to reassess its outlook once again.”

With Australia’s population growth growing around 0.4% every quarter, a 0.2% result in the December quarter will mean that Australia recorded a per capita recession in the second half of last year, meaning that output per person will have declined for two consecutive quarters without revisions to prior data.

That means that while the Australian economy is likely to get larger, the individual’s share will actually get smaller. Or, put simply, without population growth, the Australian economy would fall into recession.

It implies that productivity per person has declined. Sluggish productivity has been a feature in Australian since the GFC, a factor that has suppressed growth in household incomes, contributing to weak inflationary pressures and helping to explain why Australia’s cash rate sits at the lowest level on record.

Australia is not the only advanced economy that is currently struggling to overcome weak productivity growth.

A per capita GDP recession in Australia has not been seen in close to two decades, while an official technical recession hasn’t occurred since the early 1990s.

So the headlines on Wednesday could be all doom and gloom. However, salvation may be at hand.

While output measured in volumes and per capita terms looks set to remain sluggish or worse, nominal GDP growth looks set to be significantly faster, an outcome that will help to boost national incomes and, as a byproduct, tax revenues for the government.

“We have forecast a quarterly lift in nominal GDP of 1.3% which would see annual growth lift to 5.7%,” says Gareth Aird, Senior Economist at the Commonwealth Bank.

“The solid lift in nominal GDP over the past few years has supported the tax take and underpins the improvement in the budget bottom line.

Nominal GDP measures output including price movements during the quarter, and is the broadest measure of income in the economy.

Given the flow-on effects to government revenues, it means policymakers — regardless of which major party governs following the federal election — are in a position to support the economy in the quarters ahead, be it through tax cuts or increased investment.

The question is whether this fiscal ammunition will be deployed beyond the measures already announced or flagged?

If GDP slows to a crawl while nominal GDP accelerates, it may pressure the government to take action to support the economy, in particular, the household sector.

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