Weekly note (21/12) | Fed disappoints markets for 2019 pause

The highly anticipated December policy meeting by the US Federal Reserve was the key focus for markets this week. At the conclusion of its 2-day meeting, the Federal Open Market Committee (FOMC) announced that the benchmark fed funds rate would be increased by 25 basis points (0.25%) to a target range of 2.25% to 2.5% — the 9th rate rise in this tightening cycle that commenced back in December 2015 and the 4th increase this year. Markets had widely expected this to be the outcome and were more focused on the guidance provided by the Committee on their outlook for interest rates into 2019 and beyond. 

The statement announcing the decision highlighted the Committee's confidence in the outlook, assessing there to be the need for "some further gradual increases in the target range for the federal funds rate" providing that the economy progresses in line with their expectations. Those expectations point to growth in the US economy moderating in 2018 (from 3.1% to 3%) and in 2019 (from 2.5% to 2.3%) but still expanding at an above-potential pace out to 2020, supporting labour market conditions and inflation around the 2% target. The moderation in the growth forecasts references uncertainty referred to by Chair Jerome Powell as "cross-currents" from slowing momentum in the global economy and financial market volatility.

In response, and as our chart of the week shows, the Committee's median projections in the revised 'dot plot' now show an implied expectation for 2 rate increases in 2019 — down from an expectation for 3 increases at the Committee's September's meeting — followed by 1 further increase in 2020 before reaching a pause in the tightening cycle. While appearing to be a 'dovish hike', the indication that the Committee will not pause tightening in 2019 clearly disappointed both interest rate and equity markets. That divergence in interest rate expectations has been a key factor in driving the volatility that has battered global markets over the past few months. Alongside concerns around a slowing global growth outlook and geopolitical and trade tensions, major equity markets across the US, European and Asian regions have now fallen by around 15% to 20% from their 2018 peaks. 

Chart of the week 

Over in Europe, there was a resolution to the months-long negotiations between the European Commission and Italy regarding their 2019 budget. Italy made concessions to lower their deficit target over the next three years, including a reduction from 2.4% of GDP to a little above 2% for 2019. The Commission assessed this to be an acceptable proposal and in the process ruled out imposing financial penalties on Italy. 

Meanwhile, the Bank of England (BoE) noted in their latest policy meeting minutes that "Brexit uncertainties have intensified considerably since the Committee's last meeting". While this had resulted in financial conditions tightening and further declines for the Sterling and the domestic equity market, it had also impacted the real economy highlighted by a slower near-term growth outlook due to weakening business investment and a subdued household sector. The Bank made it clear that the outlook for the domestic economy was highly dependent on the nature of the withdrawal of the UK from the European Union. 

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There were several key developments in Australia this week. Firstly, the mid-year update to the federal budget showed that stronger-than-expected economic conditions from employment growth and commodity prices are forecast to boost the budget position by $31.3bn over the next 4 years, resulting in a greatly reduced deficit in 2018/19 of $5.2bn before a return to surplus of $4.1bn in 2019/20 (to read our full analysis see here). 

Tuesday's Reserve Bank Board minutes from the December meeting appeared to take on a more cautious assessment of the domestic economy. The key discussion was around the household sector where the outlook for consumption "continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined". The December Board meeting had occurred the day before the Q3 National Accounts were released, which would ultimately show that the domestic economy expanded by a slower-than-expected pace in the quarter weighed by a soft outturn from household expenditure (see our Q3 GDP review here). The Bank's central scenario is for strength in labour market conditions to support a gradual lift in wages growth to offset concerns around any potential negative wealth impacts.   

On Wednesday, Australian banking regulator APRA announced that restrictions on interest-only residential mortgage lending will be removed from 1 January 2019 (see the media release here). The regulator introduced this measure in April last year, which had placed a cap on banks' interest-only lending at 30% of all new mortgages. This was in conjunction with an earlier measure introduced in late 2014 that had placed a 10% annual cap on the pace of housing credit growth to investors, though this restriction was unwound back in April this year. 

According to APRA Chairman Wayne Byres, the removal of both restrictions had been justified as they had "served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards". Last week, the Council of Financial Regulators — a group comprising the RBA, ASIC, APRA and Treasury — in their quarterly statement noted that "members discussed how an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions". This had followed recent comments from RBA Governor Philip Lowe expressing concern over the economic impact from the restrictive nature of credit standards.

APRA's decision during the week is aimed at addressing these concerns, however it is worth noting that when the regulator removed the 10% cap on investor borrowers earlier this year, credit growth to that segment continued to decline. Other factors to consider that could limit the impact of the removal of the cap on interest-only lending are; the strengthening of standards around loan serviceability criteria; declining property prices weakening demand for credit; and the upcoming report due to be tabled by the Royal Commission in February next year. 

The highlight of the week was the labour force data for November that was released on Thursday (read our full analysis here). While the underlying detail within the report was broadly mixed, the key takeaway is that the nation's labour market remains in a solid state. This was headlined by employment increasing by 37,000 in the month — nearly double what the market had been expecting. The pace of employment growth has cleared slowed over 2018 but remains above growth in the working-age population, while forward-looking indicators from private surveys point to employment rising by around 20,000 per month  — a level that that is broadly sufficient to prevent the nation's unemployment rate from rising. Participation in the workforce also increased further in November to be around record-high levels. 

On the downside, the unemployment rate lifted slightly from 5.0% to 5.1%, though this likely reflected the rise in participation. Of more concern was an increase in measures of excess capacity, which are already at elevated levels and have been influential in restraining a faster pick up in the pace of wages growth. This remains a headwind to the household sector into 2019 and highlights the importance of robust conditions continuing in the nation's labour market.   

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With this our last note for 2018, I want to thank you all for reading my content this year. Your support is humbling given the vast amount of high-quality analysis that is widely available. Here, a special thanks must go to Pete Wargent who has been a big supporter of mine and I recommend you to follow his analysis. I write these posts because they reflect my passion for economics and the markets and they help me to keep track of developments, and I hope they have been useful to you. Please feel free to get in touch if you ever have any comments, feedback or questions. 

Best wishes over the Christmas holidays and for 2019.  

James    

Australian labour market mixed in November

Australia’s labour force data for November provided mixed signals, though underlying conditions appear to remain solid.  While employment growth was stronger than anticipated, the nation’s unemployment rate ticked up to 5.1% and broader measures of spare capacity also increased.

Labour Force Survey — November | By the numbers

·         Total employment increased by 37,000 in November, well ahead of the market forecast for a 20,000 addition (prior revised: 28,700 from 32,800)

·         The unemployment rate increased by 0.1ppt to 5.1%, while the market had expected it to remain at the 6-year low rate of 5.0%

·         The participation rate increased by 0.2ppt to 65.7%, which was ahead of the market forecast for 65.6% (prior revised: 65.5% from 65.6%)

·         Spare capacity increased in November with the underutilisation rate lifting by 0.3ppt to 13.6% and the underemployment by 0.2ppt to 8.5%

Labour Force Survey — November | The details

The headline addition to employment of 37,000 is, on face value, a strong outcome and near double the around 20,000 outcome that is generally required to keep the nation’s unemployment rate from rising. Volatility, however, was evident throughout this release.

According to the disaggregated data, full-time employment fell by 6,400 in November, but part-time employment posted a gain of 43,400 — its strongest rise since January. The net result equating to the headline 37,00o increase. This can be attributed to sample volatility, which can occur from month-to-month depending on the characteristics of the incoming group relative to those of the group it is replacing.

As a result, employment growth in the full-time category fell from 2.77% to 2.12% on an annual basis, and part-time growth jumped from 1.85%Y/Y to 2.7%Y/Y. On an overall basis, national employment growth remains at a robust pace of 2.3%Y/Y, though it has slowed from a very strong rate around 3.5%Y/Y at the start of the year. (click charts to expand)

Still, employment growth continues to run ahead of growth in the working-age population (1.68%Y/Y to November) and with output growth tracking at around-trend pace despite slowing in Q3, these factors are supportive of the unemployment rate remaining around its present level. This is consistent with the latest NAB Business Survey, which pointed to employment growth continuing to run at an around-20,000 pace per month.

Workforce participation remains at a historically strong level and increased further in November. The trend figure is at a record high of 65.7% and the seasonally-adjusted rate of 65.7% is just off the record mark. In absolute terms, workforce participation increased by 49,530 in the month to outpace the 37,000 increase in employment. As a result, the unemployed total lifted by 12,520 to explain the rise in the national unemployment from 5.03% to 5.11% (to two decimal places).

However, of more concern was that the underemployment rate (employed workers wanting more hours) increased from 8.3% to 8.5% and the underutilisation rate (including the underemployed and unemployed) increased from 13.3% to 13.6%. This could also reflect statistical volatility noting that these measures have been steady over the past couple of months. In any case, spare capacity remains elevated in the labour market, which is negative to the outlook for wages growth. This highlights the importance of robust employment growth continuing into 2019.

Another curious aspect from the report was that hours worked fell by 0.2% in the month despite employment rising, which slowed annual growth from 2.0% to 1.1%. Adjusting for the rise in employment, average hours worked per employee in the month fell by 0.5% to 138.6 hours, which is 1.1% lower compared to a year earlier.

Turning to the state-based data and the detail was disappointing — again, though, this can often be affected by volatility. Across the states, the change in the unemployment rates were; New South Wales -0.1ppt to 4.4%, Victoria +0.1ppt to 4.6%, Queensland +0.1ppt to 6.4%, South Australia -0.1ppt to 5.3%, Western Australia +0.8ppt to 6.5% and Tasmania +0.6ppt to 5.8%.  

In terms of employment growth, Victoria led in the month rising by 30,900, with Queensland next best at +21,800. The only other state to post an increase in November was Western Australia at a modest 1,600. Employment declined for the remaining states; New South Wales -12,600, South Australia -2,200 and Tasmania -2,500.  

Labour Force Survey — November | Insights

There were mixed signals throughout these data for November, though for the moment that appears to be impacted by statistical volatility. On the positive side, the economy added nearly twice the number of jobs expected in the month and the pace of employment growth remains robust. On the downside, spare capacity lifted as the pace of wages growth remains persistently slow. The fall in hours worked and weakness in the state-based outcomes were the other negatives.  

MYEFO forecasts lower deficit, higher surplus for 2019/20

The Australian federal government has presented their Mid-year Economic and Fiscal Outlook (MYEFO) to their budget for 2018/19. The Treasurer announced the deficit for 2018/19 is now forecast to be $A5.2bn, or 0.3% of real Gross Domestic Product (GDP), which has been lowered from the initial estimate of -$A14.5bn (0.8% of GDP) from budget night back in May. The surplus forecast for 2019/20 has been upgraded to $A4.1bn (0.2% of GDP) from $A2.2bn (0.1% of GDP). 

The improvement in the budget for 2018/19 is driven by stronger economic conditions, reflecting stronger-than-forecast growth in employment and national income flowing from higher prices for key commodity exports (iron-ore and coal), which have also had an impact over the ensuing years. The impact of stronger economic conditions boosts the budget position by a total of $31.3bn over the next 4 years; $11.2bn in 2018/19, $5.8bn in 2019/20, $7.2bn in 2020/21 and $7.1bn in 2021/22.  

The boost from stronger economic conditions is moderated by the cost of implementing new policy measures, which are a net $16.3bn over the coming 4 years; $1.9bn in 2018/19, $4.0bn in 2019/20, $5.7bn in 2020/21 and $4.8bn in 2021/22. Ahead of next year's federal election, the MYEFO documents show that 'decisions taken but not yet announced' lower revenues by around $9.3bn between 2019/20 to 2021/22 — potentially reflecting the cost of implementing tax cuts. Meanwhile, expenses relating to 'decisions taken but not yet announced' total around $1.4bn between 2018/19 to 2021/22. 

As a result of stronger economic conditions ($31.3bn) and the cost of new policy measures ($16.3bn), the net improvement to the budget is $15.0bn over the next 4 years. The budget position improves by $9.3bn to a deficit of $5.2 in 2018/19, before a $1.9bn improvement in 2019/20 to return the budget to surplus for the first time in 12 years at $4.1bn. The projections then show surpluses of $12.5bn in 2020/21 (an upgrade of $1.5bn) and $19.0bn in 2021/22 (upgraded by $2.3bn). Collectively, the budget is now forecast to be in surplus in the order of $30.4bn out to the end of 2021/22, which nearly doubles the $15.3bn surplus forecast in May's budget.


Turning to the updated economic forecasts, Treasury has upgraded their assessment for nominal GDP growth in 2018/19 by 1ppt to 4.75% to reflect the impact of stronger-than-expected prices for key commodity exports. The forecast prices for iron-ore (US$55/t) and coal (metallurgical US$120/t and thermal US$93/t) from May's budget have proven to be conservative but have been retained by Treasury in MYEFO. Nominal GDP growth for 2019/20 has been downgraded from 4.75% to 3.5%, with the terms of trade now expected to decline by 6% compared to 2.25% reducation that was forecast in May's budget.  

In terms of real GDP growth, the only change was that near-term expectations have been lowered to 2.75% from 3.0%. These forecasts are slightly softer than those published by the Reserve Bank of Australia. 

With output growth forecast to remain at an around-trend pace, the outlook for employment growth has been strengthened by 0.25ppt in each of the coming years. Meanwhile, the nation's unemployment rate is forecast to hold at 5% out to 2021/22. Forecasts for growth in the Wage Price Index have been lowered in 2018/19 and 2019/20 by 0.25ppt but retained at a very strong 3.5% pace in 2020/21 and 2021/22. 

Weekly note (14/12) | Uncertainty the only certainty for markets

Uncertainty continues to be the prevailing theme across global markets and that was reinforced by geopolitical developments this week. In a turbulent week in the UK, Prime Minister Theresa May made a surprise late announcement that the parliamentary vote on her Brexit proposal scheduled for the following day would not go ahead on the basis that it was clear to the PM that the deal would have been rejected. The PM then faced a vote of no confidence, which was subsequently won by May (200 to 117), but conceded she would not stand at the next general election scheduled for 2022. 

The path forward for Brexit is increasingly unclear. It appears PM May will now try to enter into negotiations with the European Union in an attempt to settle on a deal that can gain parliamentary support, though the indications are that there is little scope for this among European officials. Other possible outcomes range from an abandonment of Brexit, through either recision of Article 50 — which would allow the UK to unilaterally end the withdrawal process according to a recent ruling by the European Court of Justice — or by another referendum, to a hard-Brexit scenario, where the UK separates from the EU without an agreement.  

The other major event this week was the European Central Bank's (ECB) latest meeting, where the Governing Council confirmed the conclusion of its asset purchase programme (APP) by year-end. Our chart of the week shows the APP over time, where total purchases have amounted to around 2.6 trillion euros.

Chart of the week

The ECB also maintained its forward guidance that rates are expected to "remain at their present levels at least through the summer of 2019, and in any case for as long as necessary". Meanwhile, the guidance provided regarding the maturing bonds the ECB has purchased under the APP was that they "intend to continue reinvesting, in full, principal payments from maturing securities -- for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary". 

ECB President Mario Draghi highlighted that the focus of this meeting was around risks to the economic outlook, which was still assessed to be "broadly balanced" but "moving to the downside" due to "the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility".

Overall, President Draghi categorised the ECB's outlook as having "continued confidence with increasing caution". This was reflected in the updated macroeconomic projections, which saw the ECB's expectations for inflation lifted by 0.1ppt in 2018 (to 1.8%), then easing by 0.1ppt (1.6%) in 2019, before rising again to 1.7% in 2020. Meanwhile, expectations for the growth outlook were lowered slightly by 0.1ppt in 2018 (to 1.9%) and 2019 (to 1.7%). 

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It was a quieter week on the data front in Australia following last week’s stacked calendar. Property-related data was in focus early in the week, with housing finance for October posting a surprise increase for both the owner-occupier and investor segments (see our analysis here). This was followed by the ABS’ residential property price indexes, which while a lagged release still provides some useful insight into recent movements in property prices across the nation's capital city markets. Accordingly, property prices on a national weighted-average basis were assessed to have fallen by 1.5% in the September quarter and by -1.9% over the year driven by declining prices in Sydney and Melbourne (see our note here).

The highlights of the week were the NAB Business Survey for November and the latest read from the Westpac-Melbourne Institute of Consumer Sentiment Index for December. Both are closely-watched indicators and can be market moving.

The NAB Business survey showed a further slowing in both conditions (-2pts to +11) and confidence (-2pts to +3) over November. As it stands, business conditions remain above average, though the confidence measure has fallen to a below-average level. The overall interpretation is that businesses are anticipating their assessment of conditions to reduce further in the period ahead. In line with a deterioration to the outlook, forward orders — a leading indicator for domestic demand — fell to a reading of 0 in the month from +3, which is now at a below-average level for the first time in around 2 years.

According to NAB economists, the employment index within the survey was still pointing a solid pace of employment growth at around 20,000 jobs per month, which would be sufficient to maintain downward pressure on the national unemployment rate. Meanwhile, inflationary pressures remain weak with the purchase costs and final product prices measures falling in November. Labour costs lifted modestly, though that also reflects continuing strength in employment growth.

The Westpac-Melbourne Institute Consumer Sentiment Index lifted to 104.4 in December from 104.3 in the previous month. The index recorded its 12^th consecutive month above the 100 level that separates optimists from pessimists. In 2017, pessimists held sway in 10 of the 12 readings. In the analysis provided alongside the release, Westpac’s Chief Economist Bill Evans outlined that consumer sentiment was being supported by an outlook for interest rates to remain steady at their low level, strengthening labour market conditions and falling petrol prices.

The detail within the survey showed that consumers felt less confident that it was a good time to purchase property, though this had followed a sharp rise in the previous month indicating that declining prices were impacting sentiment in potential buyers. Regarding property prices, the Index of House Price Expectations lifted to 100 in December on a national basis indicating an even split of views for the future direction of prices. However, Westpac reported that in New South Wales and Victoria further price declines were still heavily anticipated.

Overall, consumer expectations for the economic outlook over the next 12 months had firmed during December but had deteriorated when broadening that outlook over the next 5 years. Another key point to highlight is that unemployment expectations lifted in the month, and while there has been a strong improvement in this component over the past year, the momentum has slowed and may be indicative of moderating labour market conditions. 

In review: Australian Q3 GDP growth slows

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%. 

*Click charts to expand 

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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.

Australian property prices fall by 1.5% in Q3

Australian property prices declined by 1.5% in the September quarter according to the ABS' Residential Property Price Index released today. Over the past 12 months, prices on a national weighted-average basis have fallen by 1.9%, which has been driven mostly by the Sydney and Melbourne markets. This series is compiled by the ABS each quarter using data provided by CoreLogic RP Data, who produce more timely updates on a monthly basis. Last week, CoreLogic released their Home Value Index for November (see here).  

Across the capital cities, the results for Q3 were; 

• Sydney -1.9% (-4.4% in year-ended terms)
• Melbourne -2.6% (-1.5%)
• Brisbane +0.6% (+1.7%)
• Adelaide +0.6% (+2.0%)
• Perth -0.6% (+0.5%)
• Hobart +1.3% (+13.0%)  
• Darwin -0.9% (-4.4%)
• Canberra +0.5% (+3.7%)

These results are shown in the chart, below.

A granular breakdown of the price changes across the cities for both houses and units are provided in the table, below.

For a historical perspective, the index totals for each capital city are shown in the chart, below, from the start of this series in 2003. According to these data, Sydney prices peaked in the June quarter last year, while Melbourne peaked slightly later in the December quarter. Reflecting these trends in the two largest markets, national property prices according to the weighted-average index numbers peaked in the December quarter last year and have been declining since. However, prices have risen strongly in Hobart and modestly on an overall basis in Brisbane, Adelaide, and Canberra, though the pace of those increases has slowed. 

  

According to the latest estimates from the ABS, the total value of residential property in Australia eased by around 1% in Q3 to $A6.847tn and the mean price declined by $9,700 to $675,000. Meanwhile, the total number of dwellings increased by 40,900 in the quarter to 10,143,700. 

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As always, when it comes to the Australian property market the analysis on this release from Pete Wargent will be essential reading.