Q3's National Accounts appear likely to have implications for the Reserve Bank of Australia. Recently in its November Statement on Monetary Policy, the Bank had upgraded its official forecasts for growth in the domestic economy to average 3.5% in annual terms in 2018 and 2019, in part reflecting upward revisions to growth in earlier quarters. So far in 2018, the profile for quarterly GDP growth has been +1.0% (Q1), +0.9% (Q2) and +0.3% (Q3). This implies a required growth figure of 1.3% for the December quarter to see annual growth meeting the 3.5% forecast. The last time quarterly growth was this strong was in Q3 2011.
The detail of growth in the September quarter was soft. In the key household sector — around 60% of the domestic economy — growth in the consumption of goods and services was a modest 0.3% in Q3, which slowed the annual pace from 2.9% to 2.5%. Weak income growth remains a persistent headwind. Real growth in disposable income was flat in the quarter, as it was in Q2, while the annual rate slowed to just 1% from 1.6%. The impact is that saving continues to reduce, falling a further 0.4ppt in the quarter to a new post-financial crisis low of 2.4%, though there were some sharp upward revisions to the Saving Ratio figures. Property price declines shape as a key risk for households and the broader economy, with potential impacts on consumption and saving.
Residential construction added to growth in the quarter (+1%), though the detail was mixed with new construction falling (-0.8%), but offset by renovations (+4.5%). Across the year, activity expanded by a strong 7.1% (construction +5.2% and renovations +11%). However, approvals are weakening, which points to a moderation in activity in 2019.
It was a weak quarter for business investment (-1.9%q/q) that was heavily impacted by infrastructure investment falling sharply (-8.2%), reflecting the completion of major projects in the LNG sector. Non-residential construction also declined in Q3 (-2.4%), though the pipeline of work has been rising. More broadly, non-mining investment is likely to drive growth over the next couple of years as indicated in the recent Capital Expenditure data.
Public demand remains a growth driver of domestic activity led by the investment side. Investment by state governments, particularly in transport-related projects in New South Wales and Victoria, is in an upswing and the pipeline of work to be done is strong.
Inventories subtracted from growth in the quarter as the 'build' in Q3 at $47m was much reduced compared to the $1.2bn increase in Q2. This partly reflected the impact of drought conditions.
Economic growth in the quarter was bolstered by a strong contribution from international trade. This was mainly led by services exports, which helped to offset a decline in iron-ore exports. Imports weakened in the quarter, with falls in both consumption and capital goods.
More analysis to follow in our Q3 review (see here).