Australia: Economy grew by 0.6% in Q3 - Westpac

The Australian economy grew by 0.6% in Q3, a downside surprise centred on weak consumer spending while annual growth jumped to 2.8% from 1.9%, notes Andrew Hanlan, Research Analyst at Westpac.

Key Quotes

“Real GDP growth in Q3 was 0.6%qtr, 2.8%yr.”

“That was weaker than expected (market median 0.7% and Westpac 0.8%).”

“The quarterly profile for GDP over the past year is 0.9%, 0.4%, 0.9% and 0.6%, with volatility partly due to temporary weather disruptions. Annual growth jumped to 2.8% from 1.9%, with a -0.3% for Q3 2016 falling out of the calculation. Recall that the July 2016 Federal Election acted to dampen activity at the time of the poll due to heightened uncertainty.”   

“The main surprise:

• The key surprise was even weaker than expected consumer spending, up only 0.1% vs a forecast 0.4%. Annual growth is a below par 2.2%. See below for a discussion of the household sector. 
• Domestic demand grew by 0.6% in the quarter despite the 0.1% for consumer spending and the 1% decline in home building activity, centred on a dip in renovation work.
• The positives are around construction – business and public, against the backdrop of stronger global growth.
• Business investment grew by 2.0% in the quarter to be 7.5% higher over the year, the strongest pace since 2012. The drag from the mining investment wind-down is greatly diminished and private non-mining investment is rising, with a need to expand the capital stock to meet the needs of a growing population.
• Public demand grew by 1.5% in the quarter and by an above trend 4.5% over the year, centred on a strong upswing in public investment which still has considerable upside.
• Net exports were neutral in the quarter, with both export and import volumes up 1.9% in the period.
• Inventories added 0.2ppts to activity, a partial reversal of a sharp 0.5ppts subtraction in Q2 when stocks were cleared as rail links to ports re-opened following weather disruptions
• The GDP income and GDP production estimates were on the weaker side, both at 0.5%qtr, while the expenditure measure was a 0.7%qtr.
• In terms of the national income picture, the terms of trade has moved lower over the past half year, following a sharp 25% increase in the year to March 2017, as commodity prices moved higher during 2016 and into 2017. In Q3, the terms of trade fell by 0.4%, following a 6.0% drop in Q2, to be 9.7% higher than a year ago.
• Nominal GDP growth is still relatively strong over the past year, at 5.9%, including a 0.6% increase in Q3.
• The GDP deflator was flat in Q3, to be 3.0% higher than a year ago. The household consumption deflator is particularly weak at 0.1%qtr, 1.1%yr”

“The household sector: Matthew Hassan, Senior Economist

• The picture around consumer spending was particularly weak in the September quarter.
• Total spending rose just 0.1%, well below expectations with outright declines across a range of discretionary categories including cafes & restaurants, recreation, household goods, alcohol and tobacco. There was a notable pull back in health spending as well.
• This was despite a somewhat improved picture on household incomes, total labour income up 1.2%qtr with upward revisions also lifting annual growth to 2.9%yr. Disposable incomes have seen a more muted lift with falling non-wage incomes and increased tax payments a significant drag.
• The net effect saw real disposable income up 0.4%qtr, but growth is still very weak in annual terms, at 0.6%.
• A key point is that the recent lift in national income growth did flow through to the household sector – there was a lack of pass-through to wages growth.
• The modest lift in income in Q3 was effectively negated by an increase in savings – the savings rate rising from 3.0% to 3.2%, but still well down from 4.9% a year ago.
• The reprioritisation towards savings over spending, as well as the concentration of spending weakness in discretionary categories, points to rising ‘risk aversion’ as a clear factor in the September quarter.”

“Comment: Bill Evans, Chief Economist

• This print will come as a major disappointment for the RBA. The big concern is whether households, the engine of the economy, accept that expectations of a lift in wages growth are unjustified and it becomes necessary to adjust spending to a lower income outlook.
• Households, particularly those with high debt levels, would come to accept that ongoing falls in the savings rate cannot continue and spending must adjust.
• In this quarter the savings rate increased for the first time in five quarters signalling a need to adjust spending to a lower income trajectory. The current consumption growth of 2.1% makes the authorities’ forecasts of consumer spending growth of 2.75% in 2017/18 and 3.0% in 2018/19 appear optimistic.”