Originally published by Cuffelinks
The Australian economy as measured by GDP grew by 0.6% in the September quarter, which was a little weaker than consensus estimates for a 0.7% gain, but is still a decent outcome. Annual growth increased to 2.8% (from 1.9%) but is artificially strong because while the negative September quarter in 2016 dropped out of the annual calculation it’s bounce back in the December quarter last year remains in (see the chart below). If growth in the current quarter comes in around 0.6%, GDP growth through 2017 will be 2.5% which is still a bit below potential growth (of around 2.75%).
The main points from the September quarter GDP data are:
- Weaker than expected consumer spending. Consumer spending only rose 0.1% in the quarter (which was all in services spending as retail volumes made no contribution). We have flagged the risks to the consumer for some time and the drags from low wages growth, slowing wealth accumulation, poor sentiment, high debt levels and rising energy costs remain. Over recent periods, wages growth has remained low but consumers have dipped into their savings to increase consumption. Solid gains in wealth (from strong home price growth in Sydney and Melbourne) gave households the confidence to run down their savings rate but the savings rate has now fallen to 3.2% from nearly 8% three years ago and it’s doubtful that households will want to keep running it down as house price gains in Sydney and Melbourne fade. As such consumer spending growth is likely to remain constrained going forward.
- Residential construction detracted 0.1 percentage points from growth, as expected. Housing construction has passed its peak and will continue to make a small negative contribution to growth in 2018.
- Underlying business investment (which takes into account asset transfers between the private and public sector) contributed 0.3 percentage points to growth, with a good lift in engineering construction and plant and machinery equipment. Business investment growth is recovering as the mining investment decline has nearly finished and non-mining investment is improving. Business investment growth will be positive in 2017, for the first time in four years.
- Underlying government spending (which takes into account asset transfers between the private and public sector) contributed 0.4 percentage points to growth. Public infrastructure spending remains high.
- Inventories contributed 0.2 percentage points to growth, but inventory levels are relatively low posing no real threat to growth going forward.
- Net exports made no contribution to growth, with exports and imports both growing at a reasonable rate. Trade is likely to be another positive contributor to growth over the year ahead as resource production continues to ramp up following the completion of various resources projects.
- Productivity growth was 1% over the past year, an improvement on the June quarter but still below its average.
- Inflation pressures and wages remain very weak. The household consumption deflator (an alternative measure of inflation) rose just 0.1% in the quarter and just 1.1% year on year which is well below the rate of inflation as measured by the CPI. And while the compensation of employees rose 1.2% in the September quarter this reflects strong employment growth - average compensation per employee rose just 0.3%qoq or 0.6% year on year reflecting slow wages growth within job categories and the loss of high paying jobs relative to low paying jobs.
Implications:
GDP growth is on track to lift towards 3% in 2018 which would be in line with the Reserve Bank’s forecasts. There are clear growth drivers emerging – the mining investment downturn is nearly complete, non-mining business investment is lifting (predominately in the services space) and public infrastructure spending is surging thanks to elevated state budget surpluses (in NSW and Vic), asset sales and the Federal Government’s commitment to boost infrastructure projects. Net export growth should remain solid thanks to strong global growth and the completion of resource projects.
These drivers should be sufficient to offset slowing housing construction and weak consumer spending. However, the risks around consumer spending need to be watched closely.
So far, moderate GDP growth has not been enough to produce the desired pick-up in inflation or wages growth. Numerous businesses are under pressure to keep costs competitive particularly in the retail, food, insurance and communications areas. High levels of underemployment are continuing to weigh on wages growth and various business surveys indicate that labour costs are still expected to remain low, so wages growth is expected to stay subdued for a while yet. While the price and wage outlook remains subdued and the risks remain significant around the consumer, it is difficult to see a near-term RBA rate hike. So we remain of the view that the RBA won’t start raising interest rates until late next year at the earliest.