Goldman Sachs has this afternoon added another rate cut to its forecasts, in July:
…economic growth at 2.5% yoy is clearly sub-potential and is the continuation in a slippage in Australian economic growth momentum since the December quarter of 2011 where GDP growth peaked at 4.3%yoy.
More importantly, it is hard to ignore that if we exclude the trade sector, gross national expenditure has now contracted for 2 consecutive quarters revealing a GNE recession. Only for a sharp fall in imports and the strength in iron ore volume growth the Australian economy would likely have contracted in 1Q13.
Of particular interest is that despite some genuine recovery in new housing construction (up 2.2% qoq to be higher 10.2% yoy) this has not followed through to the rest of the consumer basket. Alternations and additions fell 3.4% qoq and is down 7.3% yoy and real estate transfers have decline 0.5% yoy.
Of course, there can be no genuine recovery in the non-mining sector until the consumer participates and here the message remains that the consumer is income constrained and attempting to save. Of note was the strength suggested by the retail sales survey for the March quarter was reflected in today’s data with the retail components rising 1.3% qoq in volume terms. However, non-retail sales rose just 0.3% excluding motor vehicle sales which fell 1.9% qoq. Nevertheless consumption growth of 0.6% qoq has seen the annual rate slow to 2.0% yoy – the slowest since December 2009.
The real concern for the household sector is that compensation of employees expanded just 0.2% qoq as slowing wage rates combined with weak employment and hours worked to constrain income growth. Household disposable income growth did expand 1.2% qoq, however, government handouts contributed 0.3% (which are one off), 0.2% is gross operating surplus of the housing stock (which is a book entry rather than a cash item), and 0.5% is attributed to gross mixed income (which in Australia is mostly farm income).
…Slowing labour costs were reflected in a 0.4% qoq fall in nominal unit labour costs, taking the annual rate to 0.2% yoy and real unit labour costs falling 1.1% qoq to an annual rate of -0.3% yoy. In mid-2012 both the nominal and real unit labour cost annual growth was expanding at a 3% yoy rate.
Falling labour costs and a 4.0% qoq rise in corporate profits gave a small boost to profit margins in the quarter, however, the vast majority of this rise in profits is attributable to the mining sector in general and iron ore prices in particular. Given the more recent decline in the iron ore price and our $80/tonne price target for iron ore by 2015 we see the rise in profits as more of a temporary aberration rather than a start of a strong cyclical uptrend.
Goldman concludes that we have an economy with weak demand and a fall in inventories only sufficient to align themselves with weak sales. Over the past year, the mining economy expanded 11% (down from 27%) and everything else by 0.7%, which is unchanged from a year ago. No rebalancing there.
It is a relief to see some sane commentary about the magnitude of challenge confronting a consumer-led rebalancing. Getting house prices to rise enough to build more homes is only the beginning. Punters are going to have to give up saving and spend more or growth will stall as mining investment falls.
