For the first time since 2011, the Australian economy shrunk in the September quarter — and not by a token amount.
At 0.5%, the decline was the largest since the final quarter of 2008, the depths of the global financial crisis.
The contraction, well below the expected 0.1% fall, saw the year-on-year growth rate slow sharply, tumbling from 3.0% to 1.8%. That’s also well below a trend growth rate of around 2.75%, and the weakest level in six years.
While there was better news from an income perspective with nominal GDP rising by 0.5% over the quarter, adding to the 1.4% gain in Q2, that was overwhelmed by the drop in real GDP.
It’s come as a shock to many, described by Australian treasurer Scott Morrison as “more than a warning for Australia”.
It’s clearly come as a surprise to Australia’s economic community as well.
Not only was the quarterly decline well below the vast majority of forecasts, it’s taken everyone significantly longer than usual to release their economic notes, a sure sign that it’s created more than a few talking points.
Now, belatedly, they’ve begun to roll in, with the vast majority offering sanguine opinions as to what it says about the Australian economy.
Here’s what they’re saying, starting with Shane Oliver of AMP Capital.
Shane Oliver, AMP Capital
While the GDP contraction in the September quarter will no doubt invite talk of a recession (defined as two consecutive quarters of falling GDP) growth is likely to bounce back in the December quarter avoiding a recession so there is no reason to get too gloomy.
A lot of the factors which drove the weak third quarter outcome will not repeat in the fourth quarter GDP numbers. Weak September quarter GDP partly looks like payback for stronger than expected GDP growth over the year to the June quarter of 3.1%.
Looking forward, there is going to be a further ramp up in resource export volumes, non-residential building approvals are lifting considerably, mining investment is getting closer to a bottom, retail sales growth trends have picked up again, there is still a lot more dwelling construction in the pipeline, state government budgets indicate a lift in public investment and the rebound in commodity prices with the terms of trade up 4.5% in the September quarter tells us that the income recession in Australia is over. So we expect GDP growth to lift back to around a 2.5% pace in the current quarter and through 2017.
Despite our expectation that recession will be avoided and that growth will bounce back, growth is still likely to be fragile and constrained. In an ideal world now would be a time for some fiscal stimulus focused on infrastructure spending, but with public debt well up from pre-GFC levels and the government focused on reducing the budget deficit and the task of maintaining Australia’s AAA credit rating, this looks unlikely.
Felicity Emmett, ANZ
The drop in Q3 GDP is a shockingly weak result. There has undoubtedly been some loss of momentum in the economy, but there are a number of temporary elements to the weakness.
We expect that today’s numbers overstate the underlying weakness in the economy. To a large degree the weak result represents a confluence of downside surprises, some of which will be reversed in Q3. Housing is likely to rebound given the amount of work in the pipeline, resources exports should grow strongly given ongoing expansion in LNG supply, and profits growth should pick up supported by higher commodity prices and a bounce back in small business profits. Moreover, consumer spending (which accounts for around 55% of GDP) looks likely to pick up given the acceleration in retail sales over the past couple of months.
We expect a bounce in activity in Q4. In aggregate, a mixed bag of numbers, but we expect they will keep the RBA’s easing bias intact.
Scott Haslem, UBS
Today’s drop in Q3 GDP reveals an economy that’s lost momentum, with growth slowing from a trend rate of 3.1% in Q2 to just 1.8% y/y. This comes after a year of strong growth prints, while weather has clearly played a role. But given subdued income, were the jobs market to weaken further and unemployment rise for a few months –- and core inflation print below 1.5% y/y next year — the hurdle lowers for the RBA to add support to near term growth via more cuts. There would still be the question of what this is trying to achieve, given housing has already re-strengthened and the AUD has been relatively unresponsive.
More likely, given upward trends in exports, public capex & residential building, growth will rebound strongly in Q4 (as it did after the last negative print in 2011). We expect the RBA will increasingly focus on the improving growth outlook for 2017, and choose to keep rates on hold at 1.5% for the foreseeable future.
Paul Dales, Capital Economics
The fall in GDP in the third quarter needs to be seen alongside the surprising strength of the economy in the first half of the year, which was partly due to the unusual strength of net exports and public expenditure. Now we’re in a situation where those components are unusually weak, as they subtracted 0.2 percentage points (ppts) and 0.5 ppts respectively from GDP growth in the third quarter.
Admittedly, there is more worrying evidence of an easing in other areas. The 0.4% q/q rise in consumption was the smallest in almost four years and the 1.4% q/q fall in dwellings investment shows that the economy can no longer rely on the housing boom to support growth. True, the 0.5% q/q fall in business investment was the smallest in five quarters, as the mining drag faded, but final domestic demand, which is a useful guide to the underlying health of the economy, fell by 0.5% q/q.
Even so, we doubt that the first recession in 25 years has begun. The 0.5% m/m rise in retail sales in October suggests that the fourth quarter started well and a possible 12% q/q leap in the terms of trade, triggered by a surge in commodity export prices relative to import prices in the fourth quarter, will boost national income.
The odds are that GDP will rise in the fourth quarter.
Alan Oster, NAB
While the slowdown was relatively broad-based, our assessment is that the headline figure is probably overstating magnitude of the decline in the economy. Indeed, we do not anticipate another negative print in the December quarter — our early forecast is approximately 0.9% q/q, as a few one offs such as weather disruptions affecting dwelling and non-dwelling construction, and the unwinding of strong public investment in Q2 ease, although year-ended growth still only picks up to 2% y/y.
That said, softness in key categories such as household consumption and non-mining business investment, as well as in Victoria and New South Wales, are troubling.
Today’s figures, in conjunction with slowing employment and weaker business conditions, raise the possibility that the non-mining recovery has run out of steam earlier than expected. We remain comfortable with our view that the RBA will need to cut rates further in 2017.
Su-Lin Ong, RBC Capital Markets
The Q3 accounts neatly capture a key thematic for next year — a mixed picture with weaker domestic demand against a stronger export/external sector. The former appears to be playing out a little earlier and suggests a weaker starting point for domestic demand and overall growth than previously thought.
This has a number of implications. Firstly, household consumption is already patchy with less of a savings buffer than previously thought. We have long held sub trend private consumption forecasts consistent with a number of enduring headwinds with a robust housing market keeping the risks pretty balanced thus far. This will be a different story in 2017 when the current residential construction upswing peaks and as supply continues to come onstream with pockets of oversupply set to worsen. Some ripple effect is likely although more difficult to assess. We remind readers that household consumption is the biggest contributor to growth and accounts for almost 60% of GDP.
Secondly, the gains to national income at this stage of the cycle are likely to be more contained and unlikely to spur new capex or employment generation.
Thirdly, the RBA’s GDP forecasts from barely a month ago which were already optimistic are likely to be revised lower. We expect the 2.5-3.5% forecast range through to mid 2018 will be nudged down, at least for 2017. Coupled with likely unchanged inflation forecasts, this will be consistent with a mild easing bias. The weaker tone of the domestic data recently including early partials for Q4 and the details of today’s accounts suggest some genuine softening in the economy.
Michael Blythe, CBA
The economy may have completed 25 years of continuous economic growth in 2015/16, but it started 2016/17 with a whimper rather than a bang.
The main question for analysts is whether the Q3 result is just a pothole along the way, or the start of something more sinister? We favour the “pothole” analogy. Looking ahead, growth headwinds are easing. And some growth tailwinds are strengthening. In a sense it should be easier for the economy to grow from here.
The income drag from falling commodity prices has ended in spectacular fashion with the surge in key bulk commodity prices. The spending drag from falling mining capex will soon be complete. What lies ahead are the benefits of rising mining production and resource exports. The incipient infrastructure boom will also become a more important driver of economic activity. The economy will continue to reap the benefits of rising Asian incomes. Sectors like agriculture, education, tourism, health and financial services will benefit.
There are some parts of the Q3 pothole that may prove more persistent. The decline in dwelling investment is consistent with the idea that the peak in the residential construction boom is at hand. The downward revisions to the household saving rate is concerning. The gap between reasonable consumer spending growth and weak income growth has been filled by cutting the savings rate. This outcome may be harder to sustain going ahead given the lower savings buffer.
Paul Bloxham, HSBC
Today’s fall seems to reflect a culmination of various one-off factors. First, export growth was weak, as coal production was disrupted by a roof collapse at a key mine and various other factors. Second, residential construction fell in the quarter, which the statistics bureau noted was due to inclement weather. Third, there was a sharp fall in public investment spending, which followed a sharp rise in Q2. Finally, mining investment continued to fall as projects are being completed.
Taking these one-by-one. Export growth is expected to bounce back strongly in coming quarters, given that there is substantial capacity still to come on-line in the resources sector, particularly LNG export facilities. Services exports rose in Q3 and are expected to continue to rise, supported by Asian demand. In the residential sector, there is still a substantial pipeline of work yet to be done on apartment building projects which should support a rise in housing investment over coming quarters. The sharp fall in public investment is unlikely to be repeated next quarter. Mining investment is set to fall for a couple more quarters and then level out around mid-2017.
Timely indicators of conditions already show signs of a pick-up in activity in Q4. Retail sales rose in October, and in November there has been a further rise in job advertisements, the PMI, PSI and PCI. Collecting these business survey indicators together suggests a bounce back in conditions in Q4. Tomorrow’s trade numbers for October will be closely watched for signs of a bounce back in exports.
Finally, the largest effect of the recent sharp lift in iron ore and coal prices is expected to flow through in Q4. The RBA’s commodity price index has risen by 20% in AUD since Q3, and this is expected to substantially boost income. Nominal GDP growth has a strong positive correlation with commodity prices.
Stephen Walters, Australian Institute of Company Directors
Today’s National Accounts for the September quarter revealed that Australia’s economy contracted last quarter for only the fourth time in the last 25 years! The previous decline was in early 2011, owing mainly to the devastating Queensland floods that suspended coal exports. There is no such excuse today, with key parts of the domestic economy shrinking, including dwelling construction, private business investment, and even public spending – the only area that showed decent growth was household spending, thanks to a fall in the savings rate.
While the news today on volumes was bleak, the nominal side of the National Accounts looked healthier. There was, for example, another rise in the terms of trade, thanks mainly to the bounce in commodity prices, so real per capita income growth, a key measure of living standards, rose another 0.5%. This in fact is the third straight gain after falls in six of the previous eight quarters. Commodity prices have risen so far in this quarter too, so the outlook on at least this measure for the current quarter looks decent.
The Reserve Bank’s forecasts released back in November implied that officials expected a 0.7%q/q gain in real GDP today, so the actual result is a material undershoot. The fall in GDP in the last quarter probably is not the start of another sustained leg down for the economy, so should not require a policy response from the Bank.
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