In review: Australian Q3 GDP growth 1.7%; households languishing

Momentum in the Australian economy remains subdued, with real GDP growth on a seasonally adjusted basis rising by 0.4% in the September quarter to disappoint the consensus expectation for a 0.5% increase. Annual growth moved a touch higher from an upwardly revised pace of 1.6% to 1.7% but remains well below the nation's trend rate of growth of around 2.75%. 

In the September quarter, the headwinds from a weaker global economy persisted as a result of trade and geopolitical uncertainties and structural weaknesses associated with low productivity growth and aging demographics, while domestically household consumption growth slowed further, the downturn in the residential construction cycle intensified and the final phase of the unwind in the mining sector weighed on business investment. With the domestic economy operating well below capacity and inflation low, the Reserve Bank of Australia (RBA) followed up its rate cut late in Q2 with an additional 25 basis point reduction to the cash rate in July to a then-record low of 1.0%. Fiscal stimulus from the Federal government in the form of tax relief directed towards low-and middle-income earners also came online during the quarter. The combined impact generated a sizeable boost to household disposable income, however; subdued confidence prompted by concerns around the economic outlook meant that the focus was on saving and paying down debt rather than spending.

The composition of growth remains imbalanced between robust public demand, which lifted by a further 1.5% in Q3 to be up by 4.9% over the year in response to healthcare spending and infrastructure investment, and weakness in private sector demand that contracted by 0.2% in the quarter and by -0.4% through the year to be at its weakest pace since the GFC, weighed by slowing household spending and weakness in residential construction and business investment.     

— — —

GDP — Q3 | Expenditure: GDP (E) 0.5%q/q, 1.7%Y/Y

Household consumption (0.1%q/q, 1.2%Y/Y) — Growth in household consumption was 0.1% in Q3 — its softest quarterly outcome since Q4 2008 — while the annual pace eased from 1.4% to 1.2% to be at it lowest in the post-GFC period.

The detailed breakdown showed spending continues to be led by non-discretionary areas of demand (0.4%q/q, 2.0%Y/Y), highlighted by strong quarterly rises from health (0.9%) and rents (0.6%). There was further weakness from the discretionary areas (-0.3%q/q, 0.0%Y/Y), driven by sizeable declines from vehicles (-1.0%) and hotels, cafes and restaurants (-0.9%) in Q3. 

Household disposable income growth was up by a sharp 2.5% in Q3 — its strongest quarterly rise since Q4 2010 — with annual growth accelerating from 2.7% to a 5-year high at 5.1%. In real terms, disposable income increased by 2.1% in the quarter and by 3.1% over the year. These strong outturns were the result of stimulus from two RBA rate cuts in June and July, which lowered total interest payments by 2.5% in Q3, and tax relief from the Federal government that was directed at low-and middle-income earners and resulted in a 6.8% fall in income tax payments in the quarter. At the same time, however, the household saving ratio surged by 2.1ppts to a 2½-year high at 4.8%. Thus, it is clear consumers used the windfall to bolster saving rather than lift spending, which is a likely response to subdued confidence and concerns over the economic outlook. 

Dwelling investment (-1.7%q/q, -9.6%Y/Y) — For the fourth consecutive quarter, residential construction activity declined, falling by 1.7% in Q3 as the annual contraction steepened from -7.8% to -9.6% to be in its deepest downturn in 7 years. New dwelling construction is weaker still after falling by a further 2.8% in Q3 to be down by 11.0% over the year, with activity contracting at its fastest pace in 18 years. Alterations lifted by 0.6% in the quarter, though the annual decline lifted from -4.1% to -7.1%. The intensification of the downturn in the residential construction cycle reflects an ongoing deterioration in dwelling approvals, which have fallen by around 20% over the past year.   

Business investment (-2.0%q/q, -1.7%Y/Y) — Weakness persists in business investment, which, on net, declined by 2.0% in Q3 to be down by 1.7% through the year reflecting headwinds from an uncertain global economic outlook and weak domestic demand conditions. The unwind in the mining sector associated with the completion of major LNG projects took its final leg lower with a 7.8% contraction in the quarter for an annual fall of 11.2%. Accordingly, engineering (infrastructure) investment was down by 5.9% in Q3 and 12.2% lower over the year. Based on the ABS's recent Capital Expenditure survey, investment plans for 2019/20 pointed to a 16% rise from the mining sector that would bring an end to 6 consecutive years of decline. Non-mining investment lifted modestly by 1.2% in Q3 and by 2.2% year-on-year around patchy detail. Non-dwelling construction is a point of strength (3.0%q/q, 4.2%) following an upswing in approvals, though equipment investment was down by a sharp 4.5% in the quarter to be 2.2% lower over the year. Meanwhile, intellectual property investment lifted by a further 1.7% in Q3 to a robust 7.1% annual pace, while cultivated biological resources posted a 0.9% rise in the quarter but remain weak over the year at -5.9% in response to drought conditions.

          

Public demand (1.5%q/q, 4.9%Y/Y) — Robust public demand continued in Q3 and remained the leading contributor to activity over the past year. Supported by public health initiatives, consumption spending lifted by a further 0.9% in the quarter to be up by 6.0% in annual terms. Meanwhile, after a recent period of softness, strength appeared to be returning to public investment with a 3.8% rise in Q3 with further support likely from an elevated pipeline of infrastructure projects to work through.

  

Net exports (0.2ppt in Q3, 1.1ppt yr) — Net exports made a more modest contribution to activity this quarter at 0.2ppt after a 0.6ppt boost in Q2. Over the year, net exports have been a key support for the economy during a time of weak domestic demand adding 1.1ppt to headline GDP growth. Export volumes were up by 0.7% in Q3 and 3.3% over the year, driven by a ramp-up in LNG production and strength in services associated with education and tourism, though rural exports have contracted sharply (-10.5%) due to the drought. Import volumes fell for the fifth straight quarter with a 0.2% fall in Q3 to be down by 1.5% over the year, which is broadly reflective of soft consumer and business spending and a lower Australian dollar.     

Inventories (0.1ppt in Q3, -0.3ppt yr) — Inventories added slighty to activity in Q3 following a sharp 0.4ppt contraction in Q2, however they have weighed over the year with the weakness centring on the retail sector consistent with weak consumer demand.  

— — —

GDP — Q3 | Incomes: GDP (I) 0.4%q/q, 1.6%Y/Y

The real GDP income estimate posted a 0.4% rise in the September quarter, which was below the expenditure estimate but in line with the production estimate, while the annual pace ticked up from 1.5% to 1.6%. 

Australian GDP in nominal terms increased by 1.1% in Q3 that kept the annual pace steady at 5.5%. Its most recent trough came in Q4 2017 where annual growth was at 3.9%. Solid growth in each of the past 7 quarters has been driven by strength in commodities prices, though the impact was modest in Q3. The nation's terms of trade lifted by 0.4% in Q3 — its softest quarterly outcome since Q2 2018 — while annual growth eased slightly from 8.1% to 7.8%. 

Private sector company profits (excluding financial corporations) were up by 2.0% in Q3, though annual growth slowed from 14.2% to 13.2%. This strength has mainly centred on mining companies due to the tailwind from elevated commodities prices against a subdued picture from the non-mining sector. Financial corporations' profits increased by 0.5% in the quarter — its softest rise since Q4 2017 — as growth over the year slowed from 5.5% to 4.7%. 

Wages and salaries as measured by the Compensation of Employees figure increased by 1.1% in Q3, with annual growth down a fraction from 5.0% to 4.9%. The nation's wages bill has been trending higher over the past couple of years reflecting robust employment growth.

— — —

GDP — Q3 | Production: GDP (P) 0.4%q/q, 1.9%Y/Y

The production estimate for GDP in Q3 was 0.4%; in line with the income estimate but softer than the expenditure outcome, while annual growth firmed from its decade low of 1.6% in Q2 to 1.9%.

Output in Q3 was weighed by; agriculture (-2.1%), other services (-1.7%), wholesale trade (-0.7%), manufacturing (-0.6%), transport (-0.4%) and utilities (-0.3%). As a consequence of severe drought conditions, output in the agriculture sector has contracted by 6.1% over the past year. Meanwhile, the downturn in the residential construction cycle and the unwind from completing projects in the resources sector has driven a 3.3% fall in output from the construction sector from a year earlier. Also of note, production in manufacturing declined by 2.7% over the year to be broadly reflective of weakness in the sector globally in response to trade and geopolitical tensions.

The health sector continues to lead output in the domestic economy, rising by a further 2.6% in Q3 to be 8.3% higher over the year. This reflects robust growth in public spending to fund aged care services and the NDIS. Output from the mining sector has expanded notably over the past couple of years, with a ramp-up in LNG production key to its strength more recently. The industry-by-industry breakdown for Q3 and over the past year is shown in the chart, below.   

— — —

GDP — Q3 | Prices

Economy-wide inflation as measured by the GDP deflator lifted by 0.7% in Q3, which saw annual growth pare back slightly from 3.8% to 3.7%. However, growth has accelerated since reaching its most recent trough of 0.8% in Q1 2018 and reflects the escalation in the terms of trade over this period. The Gross National Expenditure deflator abstracts for this impact and continues to show modest growth at 0.5% in the quarter and 1.7% over the year. 

On a headline basis, the Consumer Price Index (CPI) lifted by 0.5% in Q3, while the annual pace firmed from 1.6% to 1.7%. Within the National Accounts, the household consumption deflator is a close proxy, though it is based on dynamic consumer spending rather than the 'fixed basket' methodology in the CPI, with this measure rising by 0.5% in the quarter and annual growth lifting from 1.9% to a 5-year high at 2.0%.   

— — —

GDP — Q3 | Productivity

Weakness persists in national productivity and has been a structural headwind for wages growth over recent years. Growth in total hours worked lifted by 0.7% in the quarter, and as this was faster than the rate of output growth at 0.4%, GDP per hour worked contracted by 0.2% in Q3. A similar dynamic is evident over the past year; growth in hours worked is up by 2.0% compared to output growth at 1.7%, thus GDP per hour worked has contracted by 0.2% over the period.

Looking at the market sector (excludes the public sector), hours worked lifted by 0.3% in the quarter to be up by 1.5% through the year. However, this was faster than the pace of output growth recorded by the sector and as a result, GDP per hour worked fell by 0.1% in Q3 and was down by 0.2% on a year earlier, though it is at least on an improving trajectory. Real GDP per capita was flat in Q3 following modest gains of 0.1% and 0.3% in the previous two quarters. Annual growth was 0.2% and maintained its subdued pace of recent times.

In response to weakness in productivity, nominal non-farm unit labour costs increased by 0.6% in Q3 and while annual growth slowed from 3.4% to 3.0%, this pace is around its highest in 8 years. In real terms, non-farm unit labour costs were flat in the quarter and down by 0.9% over the year. Overall, the inflationary pulse is likely to remain soft in line with an elevated level of spare capacity in the labour market.   

— — —

GDP — Q3 | States

In New South Wales, demand lifted by 0.3% in Q3 improving from a soft 0.1% in the previous quarter, though annual growth slowed from 1.5% to 0.6% — its weakest pace since Q2 2013 — and is down sharply from a 3.6% pace a year ago. Driving the slowdown has been household consumption, which lifted by 0.2% in Q3 as the annual pace softened to 0.8% to be at its weakest since the GFC impacted by earlier weakness in the established property market as prices corrected. Residential construction is in its sharpest downturn in 18 years with activity having fallen by around 17% over the past year reflecting weakness in approvals. Business investment lifted only modestly in annual terms (0.8%), with strength coming from non-residential construction and engineering work supported by rising public demand. 

State demand in Victoria increased by 0.4% in the quarter as growth over the year eased from 1.9% to 1.8% to be down from a 4.8% pace a year ago. Over this period, annual growth in household consumption has slowed from 3.5% to 1.3% — its slowest pace in 6 years. Though not as severe as in New South Wales, residential construction is in a downturn with activity having contracted by 2.7% over the past year. Helping to offset to this weakness has been business investment, which lifted by 4.6% in annual terms, as well as robust growth in public spending at 5.3% year-on-year. 

Turning to the other states, demand in Queensland lifted by 0.1% in the quarter and by 1.3% over the year. Household consumption growth remains subdued, while the residential construction cycle and business investment are in a sharp downturn. In South Australia, demand contracted by 0.3% in Q3 to be up by just 0.2% over the year. The weakness is being driven by subdued growth in household consumption and declining construction activity in both the residential and commercial sectors, though some offset is coming from public demand. Demand in Western Australia fell by 0.2% in the quarter and was flat over the past year. Household consumption is stronger than these figures imply at 0.1%q/q and 1.4%Y/Y, though business investment remains the clear point of weakness having contracted by 5.8% over the year as major projects in the mining sector reached completion. Tasmania led demand growth in Q3 at 0.8% and 3.3% through the year. Driving demand growth over the past year has been business investment and public demand.