From Andrew Hanlon at Westpac:
Q4 net exports: +0.7ppts
Net exports will make a sizeable positive contribution to Q4 GDP growth of 0.7ppts.That met our expectations (mkt median +0.6ppts, Westpac +0.7ppts)
Exports advanced, up 1%, centred on expanding capacity in the resource sector.
Imports were weak, contracting by 2.5%, against the backdrop of patchy domestic demand.
Q4 public demand, +0.3%
Public demand managed a rise of only 0.3% in Q4, coming on the back of a sharp fall in Q3.That was softer than we expected, (Westpac +0.7%).
The surprise was public investment, which was broadly flat. We had anticipated a modest partial rebound of 2% following a double digit slump in Q3.
Over the past year, public demand – which represents just over 20% of the economy – was broadly flat, thereby representing a significant headwind to growth.
Implications for Q4 GDP
We have shaved our forecast for Q4 real GDP growth to 0.5%qtr, 2.4%yr, down from 0.6%qtr, 2.5%yr.Inventories and public demand surprised to the downside, as did wage incomes reported in the Business Indicators survey.
Notably, Australia’s terms of trade declined by a further 1.7% in Q4 to be 10.8% lower over the year, as global commodity prices tumbled.
This represents a significant negative income shock to Australia.
As a result, incomes of business, households and governments came under renewed downward pressure in 2014.
This income weakness, confirmed in the Business Indicators update for Q4, is limiting spending power across the economy at present.
In Q4, we expect domestic demand to expand by 0.4%, reversing a 0.3% decline in Q3. Over the 2014 year, domestic demand increased by only 1.2% on our forecast.
While net exports will add 0.7ppts to Q4 growth, much of this is due to lower imports. Not surprisingly, inventories will be a major negative, subtracting around 0.75ppts from Q4 growth.
