The Reserve Bank of Australia lowered its forecast for GDP growth to 2.75% over the year to Q4 from +3.25% in February's Statement on Monetary Policy. This implied an expectation for a +0.6% outturn in the quarter, meaning that the slowdown was much sharper than anticipated according to its forecasts. This places pressure on the Bank's forecast for above-trend in 2019 (+3.0%) and trend in 2020 (2.75%) and will, therefore, lead to a firming in market expectations for rate cuts in 2019. Markets were already priced for a cut by early 2020.
The loss of momentum in the domestic economy over the second half and in Q4 was broadly based, coinciding with tight credit conditions and the headwind from slower global growth. The key focus for these National Accounts is around the household sector. Growth in household consumption on goods and services was +0.4% in Q4 and followed a soft Q3 at +0.3%. Importantly, annual growth slowed from +2.6% to +2.0% and highlights a slowing trend. There has been considerable discussion from the RBA around volatility in recent quarterly outcomes clouding understanding of the underlying trend. Real growth in disposable income was +0.6% in Q4, a stronger result than in the previous 2 quarters (-0.1% in Q2 and -0.2% in Q3), though annual growth continues to slow and is now just +0.4% from +0.9%. The household saving ratio lifted by 0.2ppt to a still very low 2.5% and can be subject to large revisions. However, an uptrend over the coming quarters would be consistent with the idea that households are cutting back on consumption after persistently weak income growth over recent years as property prices declines show no clear sign of easing.
Activity in residential construction turned around completely over the second half of 2018. Output fell by 3.4% in Q4 with new construction -3.6% and alterations -3.1%. This followed a broadly flat (+0.5%) Q3. In the first half of the year, activity in the sector expanded at an annualised pace a little below 6%, compared to a decline of around 3% annualised in the second half. This reflects a deterioration in building approvals, tight credit conditions and falling prices.
Business investment lifted modestly in Q4 driven by non-dwelling construction and equipment spending. With major resources projects now completed, the outlook for business investment is positive and should support growth over the next couple of years according to the intentions component in the recent Capital Expenditure data.
Public demand continues to support the domestic economy and led growth in the quarter and over the year. This is expected to continue for a while yet due to an elevated level of infrastructure-related projects in the pipeline, particularly in New South Wales and Victoria.
Inventories were an upside surprise in today's release adding around 0.2ppt to growth in Q4. The Business Indicators data from earlier this weak had pointed to a flat to slightly negative contribution to activity in the quarter.
Net exports subtracted around 0.1ppt from the quarterly growth figure that reflected weakness in export volumes, reportedly due to supply disruptions experienced in the resources sectors. Import volumes lifted slightly over the quarter.
One other aspect out of today's release that has gained widespread attention is that real GDP growth in per-capita terms declined for the second consecutive quarter in Q4 (-0.2% and -0.1% in Q3). Essentially, that means that population growth has effectively been driving economic growth over the second half of 2018 and highlights weakness in productivity.
More in-depth analysis to follow in our full review (link here).
