Farm sector alone added 0.5%pts y/y to real GDP in Q4-16, the most since 2008 A key driver of the upside surprise of Q4 real GDP rebounding 1.1% q/q was a surge of the farm sector. After declining for decades to a ~record low 2% share of GDP, Q4 farm production rebounded 8% q/q & 24% y/y, the fastest since 2008. Hence, farm’s contribution to GDP was unusually large at 0.2%pts q/q & 0.5%pts y/y, the most since 2008 (while non-farm GDP dropped to 2% y/y, near the weakest since the GFC).
Incredibly, this ½%pt y/y contribution is now larger than the ‘direct’ impact of housing on the economy, with slowing real housing activity seeing the contribution of dwelling investment moderate to only 0.3%pts y/y in Q4-16, halving from the peak in Q2-16, and is likely to turn negative ahead (for details see our 81-chart deep dive… Housing outlook: how much of a downturn?).
However, the ‘indirect’ impact of housing is still far more material (than farm) for the overall economy. This includes the spill-over to household durables consumption, and more importantly via the ‘household wealth effect’ of surging house prices leading to an ongoing sharp drop in the household savings rate, which has seen decent real consumption growth continue despite ongoing record low wages. In contrast, the bounce of farm production is unlikely to have a materially positive spill-over to the national economy (albeit it is still a significant boost to regional areas).
Meanwhile, looking forward, ABARES’ estimate of farm sector production suggests that growth of farm GDP will likely peak in 16/17, before turning negative in 17/18. Given the surge in Q4-16, this implies the maximum boost to GDP from the farm sector may have already passed, and is then set to become a drag through 17/18.
Remember that GDP is a rate of change measure so reversing the volumes will actually pull it down by the same amount, meaning a -1% drag over the next twelve months.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
