More GDP, this time from Westpac which doesn’t spare the gloom. After that is the always optimistic Bloxo.
Economic growth remained weak in the September quarter with significant downward revisions to history. GDP rose 0.6%qtr, 2.3%yr, a touch below our expectations of 0.7%qtr, 2.5%yr. The National Accounts show growth substantively below trend which in Australia is around 3-3.5%yr.
Growth in the Australian economy slowed in the September quarter from 2.4% in the June quarter to 2.3% in the September quarter. There was very little in the September quarter national accounts to support any optimism about the economy.
Firstly, consumer spending growth dropped to 0.4% in the quarter for 1.8% through the year, markedly below trend of around 3.5%yr. While retail sales picked up modestly (+0.7%qtr), services spending growth slowed further for a particularly weak 1.2% through the year.
One bright spot was a 2% lift in disposable incomes but it appears to be due to one-off effects such as the May/August interest rate cuts since nominal labour income only grew by 0.6%qtr. Furthermore, households remain cautious since the benefits of the disposable income lift showed up in a 1ppt jump in the household savings rate to 11.1% – the highest since June 2012.
The contribution from housing construction was disappointing with new dwelling investment lifting only 0.2%qtr with the annual growth rate dropping from 8% to 4.6%. Overall housing investment actually contracted 0.5%qtr due to a 1.5%qtr contraction in renovation activity. This contraction is clearly related to the soft consumer spending trends reflecting the ongoing caution of Australian households.
There was a 1.1% pick up in overall business investment but the critical equipment component (a reasonable proxy for non-mining investment) contracted further by 1.1% to be down 9.7% for the year. Engineering lifted by 2.8% but is still down 1.5% for the year clearly highlighting that the mining investment boom has peaked and this particularly observation is unlikely to be a signal of a delayed uplift in mining spending.
Overall domestic demand increased by a modes 0.4% to be up by only 0.9% for the year. These numbers are significantly below trend and indicate that up to the September quarter the economy has not been responding satisfactorily to substantial monetary stimulus.
An ongoing headwind to economic growth remains government spending which fell 0.2% in the quarter driven by a 5.5% fall in government investment.
There was even a marked slowdown in export growth, increasing by only 0.3% in the quarter for 6.1% growth through the year.
The GDP estimate was boosted by a 0.8ppt contribution from net exports but this was not driven by a ‘healthy’ uplift in exports but more a substantial contraction (3.3%) in imports mainly reflecting a major slowdown in capital imports.
Inflation remains under control with the consumption deflator increasing by 0.7%qtr for a 2.5% gain through the year.
Policy overview
The Reserve Bank has been forecasting 2.25% growth for 2013 so this overall number will not come as a surprise. Year to date GDP is now up 1.8%, slightly higher than the RBA may have expected due to an upward revision to Q2 from 0.6 to 0.7%.
The lack of momentum, particularly in domestic demand is unlikely to prompt the Bank to lifts its forecast for 2013 and certainly the below trend forecast for 2014 is likely to remain.
The worrying aspects of this report are that household spending remains very weak and in this quarter, despite a surprise lift in disposable income, the household sector opting to increase savings rather than spending. Because this lift in incomes is not due to labour income gains but is due to one-off boosts, there is also not cause for optimism that we are moving into a period of stronger disposable income growth. There is also little to be encouraged by around business investment. Equipment investment has contracted for the fourth quarter in a row and a surprise lift in mining-related engineering investment – the one bright spot in the business investment components – is unlikely to indicate a sustained uplift in the mining profile. We were surprised that export growth slowed and note that the GDP measure would have been much weaker if not for a big fall in imports leading to a +0.8ppt contribution from net exports.
Overall this report emphasises that the Australian economy is likely to require further stimulus in order for growth to lift back towards trend. We believe that the Reserve Bank in forecasting 2.5% (below trend) growth in 2014 is of a similar mind. However, for now that stimulus approach is focussing on ‘jawboning’ down the Australian dollar. Our view of likely policy actions by the US Federal Reserve is that prospects for a markedly lower Australian dollar are likely to be dashed. In those circumstances we expect that the conventional policy action of further cuts in interest rate will evolve in 2014.
And from the HSBC pleasure dome:
Today’s GDP release showed Australia’s economy remained sluggish in Q3. GDP rose by +0.6% in Q3 and +2.3% y-o-y (market had +2.6% y-o-y). The mining sector supported growth, with engineering investment rising in the quarter and broadly leveling out over the past year. Exports also supported growth (+6.1% y-o-y), due to rising resource exports. There were few signs of growth rebalancing in the Q3 numbers, although more recent timely indicators suggest the non-mining sectors are beginning to pick-up, led by housing. We expect growth to rebalance in coming quarters as mining investment begins to fall.
Facts
– Real GDP rose by +0.6% in Q3, to be +2.3% higher for the year (market expected +2.6% y-o-y; HSBC had +2.4% y-o-y).– The quarter saw household consumption rise by +0.4%, to be up +1.8% for the year. Dwelling investment fell by -0.5% in the quarter, to be +1.7% higher for the year. Business investment increased by +1.1% in Q3 but fell by -2.5% y-o-y, with engineering construction rising +2.8% q-o-q to be -1.5% lower y-o-y. Overall, domestic demand (GNE) growth was weak in the quarter, falling -0.1%, to be +0.1% higher y-o-y.
– A +0.3% rise in exports and a -3.3% fall in imports in Q3 saw a strong contribution from net exports in the quarter. Overall, net exports contributed +0.7 ppt to quarterly growth and +2.1ppt to growth over the past year. Exports are +6.1% higher over the past year while imports fell by -3.7%.
– Nominal GDP rose by +0.6% q-o-q (+3.6% y-o-y). The terms of trade were a drag on nominal income growth falling by -3.3% in the quarter to be -3.6% lower y-o-y.
– Productivity tracked sideways in the quarter, with GDP per hour worked flat in Q3, to be +0.9% higher over the past year.
Implications
Today’s GDP numbers were a disappointment for the market, with GDP printing at 2.3% y-o-y, compared with a market expectation of +2.6% y-o-y (HSBC had +2.4%).Growth remains sluggish and below trend, although it is not disastrously weak. Growth continued to be supported by the resources sector, with engineering construction rising in the quarter, although it was down only slightly over the year. On net, however, mining investment is still a positive contributor to growth, despite having slowed down, because capital imports have also been falling. This suggests that the domestically-produced stages of the mining investment boom have continued to support growth in recent quarters. In broad terms, mining investment has ‘plateaued’ rather than plummeted and so is not yet a drag on growth.
In addition, as new capacity has begun to come on line, resources exports have been ramping up. This has supported overall export growth of +6.1% y-o-y, although exports did pause in the third quarter itself. Mining sector value-added is at its highest level in over a century as a share of the economy, at 10.1%.
Mining investment is, however, expected to fall in coming quarters as fewer new projects are getting started. Investment in the mining sector is then expected to be a significant drag on growth, particularly from the second half of 2014 onwards – so the economy needs to rebalance.
Somewhat disappointingly, there are few signs that growth was rebalancing as of Q3. Household consumption remained subdued, rising by only +0.4% in the quarter and by +1.8% y-o-y. At the same time, dwelling investment fell by -0.5% in Q3 and was only +1.7% higher y-o-y. The household saving rate remains stubbornly high, climbing a little in Q3, to +11.1%.
Recent timely indicators do, however, suggest that growth may be rebalancing more in the final months of 2013. Consumer and business sentiment have picked up and new approvals for residential construction have risen solidly in recent months. Retail sales have also picked up in the past four months. These indicators have been supported by low interest rates, rising asset prices and greater political certainty following the change of government in September.
Our central case remains that growth will rebalance further in coming quarters, consistent with the timely indicators of conditions. We expect this to mean that the RBA will not need to deliver more rate cuts, although further signs of rebalancing are clearly needed. The recent fall in the AUD is expected to support this rebalancing.
Bottom line
Growth is sluggish and below trend, with GDP rising by only +0.6% in Q3 and +2.3% y-o-y. This surprised the market on the downside (market expected +2.6% y-o-y).The GDP numbers were supported by ongoing growth in the mining sector, with investment rising, capital imports falling and resource exports continuing to ramp up.
There were very few signs of rebalancing of growth in the Q3 GDP numbers, but more timely indicators suggest it is set to come in the next quarter or two.
We continue to expect that the RBA’s easing phase is done, though clearly this partly relies on further signs of growth rebalancing in coming months.
