Growth in the Australian economy was slower than expected in the September quarter as household expenditure decelerated, while private sector investment weakened.
Output growth on a seasonally-adjusted basis was +0.3% in Q3 — substantially below the market forecast for growth of 0.6% and the softest quarterly outcome in 2 years. Annual growth also slowed by more than expected, easing from a downwardly revised pace of 3.1% to 2.8%, while markets had expected growth of 3.3%. Growth in the domestic economy had been running at an above-trend pace over the first half of 2018 but has now eased to an around trend pace, which is estimated to be 2.75-3% in annual terms.
This loss of momentum contrasts with the most recent forecasts published by the Reserve Bank of Australia in the November Statement of Monetary Policy for output growth to lift to 3.5% by the end of 2018.
Highlighting the soft tone to Q3's data, growth on a per-capita basis — which adjusts headline growth for population increase — declined by 0.1% in the quarter, slowing the annual pace from 1.5% to 1.2%.
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GDP — Q3 | Expenditure: GDP (E) +0.4%q/q, +3.3%Y/Y
Household consumption (+0.3%q/q, +2.5%Y/Y) — The household sector only added modestly to output growth in the quarter (+0.2ppt), as expenditure growth slowed to 0.3%. There was notable weakness in areas of discretionary spending including vehicles (-1.3%), household goods (-0.3%), and clothing and footwear (-0.2%). Fitting with this trend, growth in expenditure for discretionary-related services (hotels and recreation) was outpaced by the non-discretionary areas encompassing health, education, utilities and insurance. Annual growth in household expenditure eased from 2.9% to 2.5% — the same pace from a year earlier. Over recent years, consumption growth has been volatile from quarter to quarter and that pattern held again with Q3's soft outcome following an upwardly revised 0.9% result in Q2.
Households continue to run against the headwind from weak income growth. Growth in disposable income was 0.3% in the quarter and 2.8% in year-ended terms, however when adjusted for price changes, growth in real terms was flat for the third consecutive quarter and the annual pace eased to just 1.0%. Even after slowing, consumption growth continues to clearly outpace income growth, which resulted in a further fall in the saving ratio to a new post-financial crisis low of 2.4%. Declining property prices and their impact on wealth are a risk to the sector in the quarters ahead.
Dwelling Investment (+1.0%q/q, +7.1%Y/Y) — New residential construction posted a 0.8% fall in the quarter but was more than offset by a 4.5% rise from alterations and renovations, though this tends to be a volatile component. Residential construction was strong in the first two quarters of 2018 (+3.5% in Q1 and +3.0% in Q2) and while the pipeline of work to be done is elevated, the forward-looking approvals data has weakened sharply over 2018, which points to a slowdown from mid-to-late 2019 onwards.
Business Investment (-1.9%q/q, -0.8%Y/Y) — Late-cycle weakness relating to the completion of major projects in the nation's LNG sector resulted in new business investment falling for the second consecutive quarter (-0.1% in Q2). This was mostly reflected in engineering — relating to infrastructure work — falling by 8.2% in the quarter (-11.8%Y/Y). Non-residential construction work also contracted by 2.4% in Q3 (-1.2%Y/Y). New business investment has been a drag on overall economic growth over the past year, though the recent Capital Expenditure data for Q3 had indicated that investment is set to rise in the 2018/19 financial year driven by the non-mining sector.
Public Demand (+1.4%q/q, +4.5%Y/Y) — Public sector demand increased for the 12th consecutive quarter rising by a further 1.4%, while the annual pace lifted to 4.5% from 3.7%. Underlying investment expenditure led in Q3 with a 5.1% rise to be running at 3.5% annually. Consumption expenditure lifted by 0.5% in the quarter to 4.8%Y/Y. Public demand remains a key growth driver in the domestic economy and has added more than 1ppt to activity over the past year. There is further to come with a large pipeline of state government infrastructure projects to work through.
Net Exports (+0.3ppt in Q3, +0.6ppt Y/Y) — International trade added modestly to economic growth in Q3 and over the past year. Year to date, trade has added a cumulative 1.0ppt to overall growth after being a sizeable drag in 2017 (-1.4ppts). For the quarter, export volumes were near flat (+0.1%) impacted by declines in iron-ore and coal volumes and a large fall in cereals reflecting the impact of drought conditions. Services, however, lifted by a strong 4.5%. Import volumes declined by 1.9% in Q3, reflecting weakness in consumption and capital goods. Looking ahead, drought conditions, which also had an impact on a sizeable drag on inventories (-0.3ppt) in Q3, could weigh on the nation's export performance, though resources will be supportive.
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GDP — Q3 | Incomes: GDP (I) +0.1%q/q, +2.5%Y/Y
The real GDP income estimate lifted by just 0.1% in Q3, which was below both the expenditure (+0.4%) and production (+0.3%) estimates. In annual terms, GDP (I) slowed from 2.9% to 2.5% — its softest pace in 2 years.
Nominal GDP growth was 1.0% in Q3 — another solid result after 2.2% in Q1 and 1.1% in Q2. Over the past year, nominal GDP growth was 5.2% and has lifted from the 3.7% pace from 2017. The key factor has been rising prices for key commodity exports, which has driven a boost in national income. This was reflected by the terms of trade rising again in the quarter (+0.8%) and over the year (2.7%), though the true extent can be better highlighted if analysed from the recent trough in Q1 2016. Since then, the nation's terms of trade have surged by more than 20% providing a windfall for the federal government and resources companies.
Corporate profit growth remains strong, rising by 1.7% in the quarter and lifted annual growth from 6.3% to 7.1%. Private non-financial companies, driven by the mining sector, continue to lead the way where profits were up by 2% in the quarter and by 7.5% over the year. For financial companies, profits lifted 1.7% in Q3, though the annual pace was little changed at 5.8%.
Total compensation of employees through wages and salaries lifted by 1% in the quarter, though the annual pace eased back to 4.3% from 4.6%. Over the past couple of years growth in income has been trending higher after weakening to just 1.7%Y/Y at the end of 2016. An increase in hours worked was again the key to this outcome, which lifted by 0.4% in the quarter and by 2.1% for the year, in line with strong employment growth even after a recent easing.
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GDP — Q3 | Production: GDP (P) +0.3%q/q, +2.5%Y/Y
The outcome for the GDP (P) estimate in Q3 at 0.3% came in between the income and expenditure estimates. Annual growth slowed from 3.0% to 2.5% — in line with the income estimate but well below the expenditure estimate.
For Q3, declines in output were headlined by agriculture, transport, manufacturing construction and mining. Reflecting the impact of drought conditions, output in the agriculture sector contracted sharply over the past year.
At the other end of the scale, output continues to be led by the healthcare sector in response to strong spending by both households and governments, the latter also driven by the implementation of the national disability insurance scheme. As a result, employment growth in the sector has continued to remain strong.
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GDP — Q3 | Prices
The National Accounts provide the GDP implicit price deflator, which is the broadest measure of economy-wide inflation. According to this measure, price levels increased by 0.8% in the quarter to 2.5% annually, which follows a subdued Q2 (0.2%q/q and 1.9%Y/Y). This has, in part, been influenced by the strengthening in the terms of trade. The Gross National Expenditure deflator, which adjusts for the terms of trade impact, showed a more subdued rise of 0.6% in Q3 and 1.8% annual terms.
The household consumption deflator provides the closest proxy to the Consumer Price Index (CPI) but reflects dynamic changes in spending patterns, unlike the fixed-basket methodology of the CPI. On this basis, prices lifted by a modest 0.3% in the quarter and have lifted gradually over the year by 1.8%. The latest CPI data showed a 0.1% lift in Q3, with the annual pace at 1.9%, indicating that the two measures are now broadly in line.
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GDP — Q3 | Productivity
Productivity growth remains soft in the domestic economy. In the quarter, GDP per hour worked fell by 0.1%, with total hours worked (+0.4%) increasing faster than output growth (+0.3%). Annual growth in GDP per hour work held steady a very subdued 0.6%. Productivity growth is even softer when analysing the market sector, with GDP per hour worked falling 0.2% in the quarter to remain at 0.4% in annual terms.
There is also little to indicate a change in cost pressures. Nominal non-farm unit labour costs increased by 0.9% in the quarter following a decline of 0.3% in Q2, though the annual pace only lifted slightly to 0.8% from 0.6%. This compares to the recent peak of 2.5% in Q4 last year. Adjusting for inflation, real growth in non-farm unit labour costs was flat in Q3 and declined by -1.5% over the year, decelerating from -1.3% last quarter. Declining real non-farm unit labour costs points to a weakening in labour cost pressures ahead. In the absence of a stronger pick-up in nominal wages growth, real unit labour costs and the broader inflationary pulse will remain soft.
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GDP — Q3 | States
State demand growth was strongest in New South Wales (NSW) in Q3 at 1.1%, lifting the annual rate to 3.7% from 3.4%. Growth in the quarter was driven by public demand in both expenditure and investment, with the latter to remain a growth driver for the state in coming years led by transport-related infrastructure projects. Private sector investment also had a positive quarter, driven by non-residential construction and equipment expenditure, though the engineering component declined. In the household sector, NSW consumption at 0.2% was a fraction slower than the national result even though the state has the lowest unemployment rate across the nation. Residential construction declined in the quarter ahead of a likely slowing over the next couple of years.
In Victoria, demand in Q3 softened to 0.2% from 1.4%, though the annual rate remains the strongest in the nation despite slowing to 4.3% from 5.0%. The key for the Victorian economy has been a strong upswing in public investment, while the pipeline of work to be done continues to rise. Private sector investment was modest in Q3 as a gain in engineering work was weighed by weakness from non-residential construction and equipment expenditure. Victorian household consumption expanded by 0.5% in the quarter and by 3.3% over the year, though the state has also had the fastest rate of population growth in the nation. New residential construction pulled back 3.3% in the quarter and is likely to follow a broadly similar trend to NSW.
For the other states in Q3, Tasmania led with demand rising by 0.7% (4.1%Y/Y) with residential construction the driving factor. Demand contracted in both Queensland (-0.4%q/q, +2.2%Y/Y) and South Australia (-0.2%q/q, +2.7%Y/Y) weighed by private sector investment. In Western Australia, demand growth was 0.4% in the quarter, but the annual rate turned negative (-0.6%) for the first time since Q2 last year. Private investment has been a drag reflecting the completion of major projects in the resources sector, while household consumption growth remains soft.
