Australia churned out another quarter of economic growth in early 2017, extending the nation’s run without experiencing a recession for a record-breaking 103 quarters.
At 0.3%, real GDP printed in line with expectations, although the pace was significantly below the 1.1% increase reported in the final three months of 2016.
It also saw the annual pace of growth slow to just 1.7%, the weakest since the September quarter 2009.
Looking through volatility caused by weather disruptions over the past nine months, seeing inventories and net exports swing wildly from growth drivers to growth inhibitors, the one prevailing theme remained weakness in household consumption, the largest part of the economy.
It grew by a paltry 2.3% from a year earlier, continuing to decelerate from the levels seen only a few years ago.
And that was despite a further decline in the household savings ratio, with consumers forgoing savings in order to spend, an outcome no doubt impacted by weak incomes growth and an increased household indebtedness.
Despite Australia’s record-breaking run without recession, something that’s been assisted by high population growth, the weakness in consumption remains a concern, and one that will make it more difficult for the RBA to spur on economic growth, increased employment and higher levels of inflation should it persist.
Now that there’s been time to digest the GDP report, it’s time to see what Australia’s economic community has made of it all — is Australia’s run without a recession something to cheer, or are there gremlins lurking beneath the surface that could see that run come to an end?
Here’s what economists have to say.
Ben Jarman, JP Morgan
The level of GDP growth and domestic demand growth, both at 1.7%oya, remains too low to eliminate spare capacity. The mix is also soft, given that the scapegoats for weaker growth in 1Q which would usually be dubbed as temporary noise factors, are unlikely to fully recede. At the same time, the deceleration in consumption, as households run out of balance sheet flexibility, is tracking.
Household consumption growth decelerated a little more than expected from 1.0% quarter-on-quarter to 0.5% quarter-on-quarter in the March quarter. This is a sluggish outcome given population tailwinds, and came despite support from a falling saving rate, underscoring the weakness of household income growth.
The 1Q national accounts add to the string of data on the activity side showing that the economy is below trend and will not be reducing excess capacity soon. With the household sector subject to further headwinds from rising interest servicing costs, the pressure on the RBA’s 3% and above GDP forecast continues to mount.
Felicity Emmett, ANZ
Some of the weakness in Q1 is likely to prove temporary, although a bounce in Q2 looks unlikely at this stage. Housing may recover from the Q1 weather related weakness, but Cyclone Debbie has hit coal exports, inventories are likely to unwind and profits will be hit by the fall in commodity prices.
More broadly, there looks to have been a sustained step-down in the pace of consumer spending growth as households adjust to the new world order of very low wage growth. On that front, wages growth actually picked up in the quarter, but growth in unit labour costs remains negligible, which suggests that inflation is likely to stay low.
In terms of the outlook for policy, in Tuesdays post-meeting statement the RBA downplayed the likely soft result for GDP, characterising the weakness as “reflecting the quarter-to-quarter variation in the growth figures”. We think this is likely to prove to be too optimistic. Annual growth at an eight year low, with little prospect of any improvement in Q2, suggests that the economy is not running strongly enough to eat into spare capacity. This will clearly have implications for the trajectory of the unemployment rate and hence the outlook for wages. While the worst may be over on the inflation front, the persistent weakness in unit labour costs points to an ongoing absence of domestic costs pressures.
In our view, this will leave the RBA on hold for the foreseeable future.
Riki Polygenis, National Australia Bank
A number of one-offs contributed to the softness in Q1 and the decline in Q3 last year – including weather-related disruptions to exports and dwelling construction. Unfortunately, the volatility in exports is likely to continue given cyclone disruptions to coal in Q2, raising the likelihood of another soft GDP print in Q2. Volatility in the GDP data complicates assessment of current economic momentum and the implications for the outlook.
At this stage, we continue to expect a rebound through the second half of 2017 as LNG exports surge and government investment strengthens, but a softening in growth in 2018 as LNG exports and the dwelling construction cycle peak. The pace of household consumption and business investment will be key.
Today’s data is consistent with monetary policy remaining on hold. The RBA will look through the volatility in GDP, however mixed labour market outcomes and weak wages and inflation data will prevent any hike. Meanwhile, there is tentative evidence that macroprudential and policy changes are leading to a softening in dwelling price growth, which will help to mitigate economic risks associated with rising household debt levels should it continue.
Gareth Aird, Commonwealth Bank
Weather has once again adversely impacted on economic activity over the quarter, like it did in Q3 2016. To recall, growth contracted by 0.5% during the September quarter last year only to rebound by a sizeable 1.1% in Q4. However, the weakness in today’s data extends beyond the weather. And the slowdown in the domestic economy has occurred at a time when the global economic backdrop has improved. This suggests that policymakers have their work cut out for them if Australia is to post the kind of growth outcomes they have forecast over 2017.
On the monetary policy front, the market is correctly pricing in the chance of further policy easing. Today’s growth outcomes have significantly undershot the RBA’s expectations and it will take a heroic effort from here for GDP growth to meet their year-end forecast. However, we think that Governor Philip Lowe is desperate not to cut rates given it risks stimulating the housing market again. As such, we think that policy easing is off the table unless the housing market falters or the unemployment rate materially rises. The most recent employment reports suggest that things have improved a little more recently. But the dynamics at work in the economy suggest that any move in rates over the next year will be down and not up.
Stephen Walters, Australian Institute of Company Directors
The sobering news was that real GDP growth over the year has slipped to just 1.7% year-on-year, the weakest outcome since Q3 2009. That was the period immediately after the global financial crisis, so the comparison is not flattering, and should raise fresh questions about the 3% real economic growth forecasts assumed by Treasury in last month’s federal Budget. The Reserve Bank statement yesterday also stuck with the assumption that GDP growth will return to a 3% rate. We shall see.
For now, Australia’s economy clearly is not firing on all cylinders, but at least is still managing to grow, albeit not at a consistent pace.
Australia is well into its 26th year without back-to-back declines in real GDP, an impressive record that rivals that of the previous record holder the Netherlands, so we should not be too downbeat. In fact, our positive track record is quite remarkable given the stiff challenges we have faced since the end of the last recession in 1991, including the most recent disruption caused by the twin commodity price and mining investment booms. In the past, Australia typically did not handle prosperity that well, but so far so good on that score.
Su-Lin Ong, RBC Capital Markets
Digging through the accounts, we would make a few observations. Firstly, the weaker real versus stronger nominal/income story largely reflects upside surprises to commodity prices for much of the period since mid 2016 and is unlikely to continue. Given a number of challenges to real activity, the odds favour some convergence between real and nominal activity led by some moderation in the latter.
Secondly, the gain in national income remains very much skewed toward corporates. This is consistent with our view that the recent upswing in the terms of trade is far more narrow in its impact on the broader economy than the last cycle. It may, however, finally be lending some support to new business investment, which recorded its second consecutive quarterly gain.
Thirdly, the composition of domestic demand in Q1 hints at a profile further into 2017 and more so in 2018, which likely shifts away from residential construction, which has been a key contributor to both growth and employment.
Fourthly, the wage, consumption, and household savings dynamics remain worrying. Highly indebted Australian households continue to save less to fund expenditure. At 4.7%, the household savings rate has fallen by more than 2 percentage points over the last 12 months and has been on a general downward trend over the last 3-4 years. It is questionable how much further it can decline in an environment of still-elevated unemployment, an easing in house prices, weak wages growth, and below-average consumer confidence. We struggle to see much of a pick-up in private consumption in 2017 or most of 2018.
And finally, the persistently weak trend in unit labour costs, which are the key driver of non-tradable inflation and feed into the inflation outlook over the next 4-6 quarters, suggests that the risk lies in core inflation staying below the floor of the RBA’s 2-3% target range for longer. This will give it scope to ease should activity fall short of its forecast, which assumes a return to 3%-plus growth
Paul Bloxham, HSBC
Today’s headline print for Q1 was weak, but most of the weakness is weather-related and therefore temporary. Cyclone Debbie and wet weather on the East coast weighed on housing construction and exports. Timely indicators already suggest a bounce back. A clearer read of underlying conditions may be gleaned from surveyed business conditions, which are around decade-highs. And why shouldn’t they be? Corporate profits are up 30% year-on-year and nominal GDP rose by 7.7% year-on-year, its fastest pace in over five years. Add to this, Australia just set a new record for developed world growth, with a 26 year boom!
If yesterday’s RBA announcement is any guide, the central bank is largely ignoring the volatile, weather-effected GDP numbers and looking at the business and labour market surveys, which still show trend improvement. We see the RBA on hold this year and a hike in early 2018.
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