Downside risks for Australian GDP are still growing

David Scutt
  • Australian Q4 business indicators were universally weak.
  • Inventories declined during the quarter and will not add to Q4 GDP as most expected.
  • Business profits were also soft, only propped up by stronger outcomes for mining.
  • Growth in salaries and wages was also weak, only increasing marginally despite firm hiring during the quarter.

The latest input for Australia’s Q4 GDP report has just arrived with the release of business indicators from the Australian Bureau of Statistics (ABS).

Like the vast majority of the partial indicators received so far, they were a little soft, pointing to even greater downside risks for quarterly GDP growth.

Company operating profits before tax rose by 0.8% in seasonally adjusted chain volume terms, undershooting expectations for a larger increase of 3.0%.

“Profits are up on higher commodity prices, with mining profits lifting 4%,” economists at Westpac said.

“Non-mining profits were broadly flat in the quarter, indicative of an economy that was relatively sluggish in the period.”

ANZ Bank

Business inventories also undershot forecasts, declining by 0.2% during the quarter after seasonal adjustments, a performance in stark contrast to the 0.3% lift expected.

Rather than adding marginally to Australian economic growth, inventories will now make no contribution to growth in the December quarter, increasing the risk of a per capita GDP recession, defined as two consecutive quarters of negative economic growth once population growth has been accounted for.

“[This is] a weak result that adds downside risk to our Q4 GDP forecast of 0.4%,” said the NAB’s Australian economics team.

“Inventories ticked down 0.2%, equivalent to a flat contribution to quarterly GDP growth after accounting for revisions.

“The data will be little comfort to the RBA, as it’s optimistic 0.6% forecast for Q4 GDP looks increasingly out of reach.”

Reflecting the recent slowdown in Australian employment growth, total wage and salaries paid also remained weak, lifting by just 0.8% for the quarter and 4.1% over the year in seasonally adjusted terms.

ANZ Bank

“With the rise driven largely by gains in employment, the GDP measure of average wages is once again set to be weak,” said Felicity Emmett, Senior Economist at ANZ Bank.

This measure accounts for both wage and employment growth in Australia.

“While the former has been gradually picking up over the past year or so when measured in average hourly rates, the latter has been slowing, keeping growth in household incomes on a national aggregate level weak.

“It suggests wages only slightly outpaced employment growth in the quarter,” the NAB said.

Following the release of the Q4 business indicators, the final pieces of the December quarter national accounts will arrive on Tuesday with the release of net exports and government demand figures from the ABS.

These account for a large parts of the Australian economy and could quickly see expectations for the Q4 GDP growth change, both to the upside and downside.

However, the largest component of the Australian economy — household consumption — won’t be known until the actual GDP report report is released on Wednesday this week.

From the evidence seen in Australian retail sales during the quarter, something that accounts for around a quarter of total consumption, spending by households late last year was likely to be pretty weak.

“Q4 business indicators data were weaker than anticipated, with profits, inventories and wages all below our forecasts,” said Emmett at ANZ Bank.

“Together, these numbers provide a downside risk to our forecast for a 0.2% rise in Q4 GDP, and raise the prospect that GDP could print negative in the quarter.”

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