Downside risks for Australian economic growth ease, but not for good reasons

Cate Gillon/Getty Images
  • Inventories at Australian businesses rose unexpectedly in the March quarter, diminishing downside risks for Q1 GDP growth.
  • The increase partially reflects weakness in retail sales in the first three months of the year.
  • Australia’s Q1 GDP report will be released on Wednesday, June 5.

Inventories at Australian businesses rose unexpectedly in the March quarter, diminishing downside risks for GDP growth when the latest national accounts are released on Wednesday.

However, the reason behind the increase is concerning.

According to the Australian Bureau of Statistics (ABS), inventories rose by 0.7% in the three months to March in seasonally adjusted chain volume terms, surprising economists who were looking for an unchanged reading from Q4 2018.

The result will boost quarterly GDP growth by around 0.2 percentage points, reducing downside risks after a spate of weaker-than-expected GDP inputs released over the past month.

“Arithmetically this is a positive [for Q1 GDP], but also helps corroborate softness in final demand, particularly for consumer goods,” said Ben Jarman, Economist at J.P. Morgan.

“This helps resolve a few questions around consumption given Q1 retail volumes report had posted a surprising contraction”.

According to Jarman, inventories at retailers rose 1.7% during the quarter, driven largely by weaker sale volumes over the same period.

Put simply, the increase in inventories was caused by weak demand.

“Rising inventories and disappointing sales are not a good combination for the outlook,” said Felicity Emmett, Senior Economist at ANZ Bank.

Ahead of Australia’s March quarter national accounts released on Wednesday, Jarman at J.P. Morgan is still looking for quarterly GDP to lift by 0.4%.

Emmett at ANZ Bank is slightly more optimistic, forecasting quarterly growth of 0.6%, albeit with downside risks.

Before today’s Business Indicators were released, the median economist forecast offered to Bloomberg was looking for GDP to increase by 0.4% in the March quarter, seeing the year-ended growth rate slow to 1.8%, the weakest since the GFC.

Looking ahead, the final pieces of Australia’s GDP jigsaw puzzle will arrive on Tuesday with the release of net exports and government demand.

Like inventories, they are large GDP components, carrying the ability to alter growth expectations dramatically.

Adding additional uncertainty before the national accounts arrive on Wednesday, the largest component of the Australian economy — household consumption — won’t be known until the actual GDP report is released.

This component makes all other GDP inputs look small, accounting for just under 60% of the economy.

Retail sales volumes, accounting for around 30% of household consumption, went backwards in the March quarter, partially contributing to the lift in inventories seen in today’s report.

The question now is whether the weakness in retail turnover also extended to spending on services.

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