Australian economic growth looks set to slow sharply

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If the early indicators are anything to go by, there’s unlikely to be much to crow about when Australian GDP is released on Wednesday next week.

Only three months after celebrating 25 years without experiencing a technical recession, second only to the Netherlands in terms of an uninterrupted period of economic growth for a developed nation, growth looks set to slow sharply, or worse, in the September quarter.

Retail sales volumes, dwelling investment and business capital expenditure all contracted during the quarter, seeing expectations for economic growth scaled back substantially.

Of 25 economists polled by Bloomberg, the median economist forecast for real GDP growth is just 0.2%, a figure well below the 0.5% pace of the June quarter should it be correct.

Forecasts range from growth of 0.7% to a decline of 0.3%.

Yes, a decline. A quarter of negative economic growth, something that has only been seen on three occasions over the past quarter of a century.

The National Australia Bank and Nomura Australia are both calling for a decline of 0.2%, while Morgan Stanley, at -0.3%, is the most bearish forecast of the lot.

At the other end of the spectrum, Market Economics, at +0.7%, has the most optimistic view of all economists surveyed.

With quarterly growth expected to slow sharply, or contract, the year-on-year GDP growth rate is tipped to slow to 2.5%, well below the 3.3% pace seen in the June quarter.

That would also be below the 2.75% level many now deem to be Australia’s “new” trend growth level.

The NAB’s economics team, one of the few calling for a negative growth quarter, say that the “expenditure measure of GDP is looking particularly weak with partial data pointing to a broad-based decline in business investment, a surprise contraction in dwelling investment and a subtraction from net exports (-0.3ppt)”.

It says household consumption growth, the largest component within GDP, will also be subdued, forecasting growth of just 0.4%, continuing the theme seen in the June quarter.

The NAB also says that there are downside risks to its forecasts for a 0.1% lift in public demand, again another chunky component within the GDP mix.

“Our forecasts (2.1% yy) are well below those published in the RBA’s latest Statement on Monetary Policy which suggested real GDP growth of approximately 2.75 to 3%,” it says.

“This may elevate the RBA’s concerns about the non-mining economy, particularly given uncertainty about the labour market at present.”

While it is not calling for an outright contraction in GDP, ANZ’s economics team note that “many of the recent partial indicators have disappointed”.

It’s calling for flat real GDP growth for the quarter, leaving the year-on-year growth rate at 2.3%.

“Some slowdown in GDP growth would not be surprising given the apparent loss of momentum in the labour market, but we are surprised by the extent of the weakness evident in these preliminary numbers,” it said.

While the early GDP inputs have been weak, leading to subdued growth forecasts for the quarter, there are still several inputs that will arrive in the days ahead, including profits, inventories, net exports and government spending data.

It’s also worthwhile remembering that the early GDP inputs before the June quarter GDP report were also weak, leading to a scaling back of expectations.

Then the a raft of strong figures on government spending, net exports and inventories were released, eventually leading to a quarterly GDP growth rate of 0.5%.

We’ll know far more about how the Q3 figure will print as these figures arrive on Monday and Tuesday next week.

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