From Westpac’s big man, Bill Evans:
The growth in the quarter of “only” 0.3% contrasts with market expectations of 0.7%. That “miss” of 0.4ppts is largely explained by a sharper than expected contraction in public investment (–0.2ppts) and a larger than expected contraction in mining investment (around –0.2ppts). Both these effects are volatile but it is true to note that these two factors have been continuing headwinds for the Australian economy over the last year or so.
• Another headwind has been the concentrated fall in our terms of trade in the last six months. The terms of trade decreased by 3.5% in the quarter following a decrease of 3.7% in the June quarter. Those falls have weighed on real net national disposable income, which adjusts the GDP measure for the terms of trade – wages and profits are affected by this measure. This measure fell by 0.3% in the September quarter following a 0.2% fall in the June quarter. Such effects will impact household expenditure and business investment.
• In that regard household consumption grew by a “soft” 0.5% following an upward revised 0.8% in the June quarter. Under the pressure of this income squeeze consumption held up reasonably well partly because the savings rate has fallen from 9.7% in the March quarter to 9.3% in the September quarter. Indeed we had expected the annualised pace of consumption growth over the last 2 quarters to be 2.2% whereas it is now printing at 2.6%. Consumption in the quarter was also marked by a “curious” fall of 0.5% in food consumption – a more normal contribution from food would have boosted consumption growth to 0.6% in the quarter.
• The contraction in mining investment is due to the scheduled reduction in investment in large mining projects as well as a trend for mining companies to defer new projects in the face of falling commodity prices. Non-residential investment also slowed to an annualised growth rate of only 3.6% in the quarter from an annualised pace of 12% in the previous two quarters. On the other hand we saw machinery and equipment investment lift by 7% in the quarter – an encouraging sign that the economy is gradually rebalancing away from investment in mining projects to more general activity across the services sector.
• After getting over the initial shock of such a low growth number the authorities are likely to be less alarmed. The weak number is the direct result of the income squeeze from the sharp fall in the terms of trade coinciding with the winding back of the mining investment boom and ongoing fiscal tightening.
Looking ahead to 2015 we expect a number of these factors to change markedly. The terms of trade are likely to stabilise and start moving up as the world economy gathers momentum, specifically through the US; as well as China and the emerging markets; fiscal policy is likely to be less restrictive partly in response to these disappointing growth figures and the looming threat to the labour market; household spending should gather pace as the savings rate continues to fall, particularly in response to the boost to wealth of Australian households who are benefitting from strong asset markets; and as these signals become clearer to businesses a lift in investment and employment will become apparent.
• From a policy perspective a less restrictive approach to fiscal policy, especially through Commonwealth sponsored infrastructure investment, would be welcome. The Reserve Bank is likely to be patient waiting to assess whether the outlook which we have described begins to unfold.
Commodity rebound? On what? Coal, nope. LNG, nope. Iron ore, nope. Gold, nope? That’s 65% of the terms of trade right there. If I’m right about iron ore falling to $50 by the end of 2015 that’s another 7% terms of trade hit alone. The income recession has only just begun.
Looking to consumers to pick up spending on the back of a fading housing bubble in these conditions is very hopeful.
Authorities ought to be worried after today. Very worried. Real recession looms as a threat next year and the cuts will come.
