(The following statement was released by the rating agency) Fitch Ratings-London-May 29: Australia's GDP growth will slow to a decade low of 2% this year despite the cushion provided by de-synchronised movements in house prices and commodity prices. The latest 'Chart of the Month' by Fitch's economics team highlights how offsetting trends in house prices and commodity prices have historically been a stabilising factor in Australia's growth rate. This pattern is in evidence again now but its influence appears to be weakening, possibly reflecting a heavier household debt burden. The Australian economy has been slowing down quite sharply since the second half of last year, and high frequency indicators point to this weak momentum having carried over into the first half of this year. GDP growth has stepped down from 3.1% yoy in 1Q18 to 2.3% yoy in 4Q18, and Fitch Ratings' latest forecast (please click on the link) expects it will bottom out at around 1.6% yoy in 2Q19. Weakening momentum has been triggered by a protracted downturn in the housing market. Declining house prices (down 5.1% yoy in 1Q19) have dragged down construction activity and prompted households to hold back their spending against a backdrop of sluggish income growth, a low savings ratio and high debt. In turn, the cooling of the housing market has followed the introduction of tightening macro-prudential measures by the Australian Prudential (LON:PRU) Regulation Authority (APRA) to stem mortgage credit growth, particularly for investors, and a reduction in Chinese demand, against a backdrop of stretched valuations. Banks have also implemented tighter underwriting standards in recent years, and lending behaviour has become more cautious in the aftermath of the Royal Commission's report investigating banking practices. While Australia's domestic economic momentum has clearly faltered, export receipts have surged amid buoyant bulk commodity prices such as that of iron ore. Australian bulk commodity prices (in Australian dollar (AUD) terms) were up 15% yoy in 1Q19. This has provided a welcome cushion for the Australian economy - through direct higher income for businesses - whose commodity exports account for 60% of goods exports, or 12% of GDP. However, despite positive commodity price tailwinds, we expect full-year 2019 Australian GDP growth to hit 2.0%, its lowest since the 2008-2009 global financial crisis.
Fitch Ratings' Chart of the Month shows the historical relationship between house prices and the terms of trade (ie the ratio of export prices of goods to import prices, which is driven by movements in commodity export prices). The terms of trade are displayed on an inverted scale (right-hand side) highlighting how they have tended to move in the opposite direction to house prices in the past. The de-synchronised nature of commodity and housing cycles has traditionally been a factor supporting the stability of the Australian economy, with higher commodity prices helping to offset negative spill-overs from weak house price, and vice versa. But this will not be powerful enough to prevent overall growth slowing to a ten-year low of 2% in 2019, according to Fitch Ratings' latest GEO forecast. Weaker household balance sheets have likely been a factor amplifying the impacts of the recent housing downturn.