Growth in the Australian economy was softer than expected in the December quarter (Q4) marking a notable loss in momentum over the second half of 2018. Household consumption continued to slow, residential construction activity turned down and business investment was soft. Tight credit conditions and the headwinds from slowing global economic conditions were also key influences.
Real GDP growth in seasonally-adjusted terms was +0.2% in Q4 and was below the market median forecast for a soft +0.3%. GDP growth on an annual basis slowed from a downwardly revised pace of +2.7% in Q3 to +2.3% and printed below the market forecast for +2.5%. Growth in the domestic economy can, therefore, be described as having slowed to a below-trend pace. Trend growth is estimated at around 2.75% and is regarded as the pace of growth required to maintain stability in unemployment and inflation.
In its February Statement on Monetary Policy, the Reserve Bank of Australia (RBA) had forecast annual GDP growth in Q4 at +2.75%, +3.0% in 2019 and +2.75% in 2020. Though still upbeat, these forecasts were initially stronger until Q3's soft GDP growth outturn led to a downgraded assessment. A similar scenario appears to be forthcoming, though the main difference this time would be that slower growth would likely have implications for its unemployment rate forecasts, which were previously expected to tighten to 4.75% by end-2020. The labour market has been a key support for the domestic economy, however; a softer outlook would bring the prospect of rate cuts into firmly into focus. Financial markets have brought forward expectations for easing and now expect the RBA to cut the cash rate by 0.25% by Q4 this year.
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GDP — Q4 | Expenditure: GDP (E) +0.3%q/q, +3.1%Y/Y
Household consumption (+0.4%q/q, +2.0%Y/Y) — Household spending clearly slowed over the second half of 2018. On an annualised basis, household consumption was tracking at around 2.5% through the first half but slowed to around 1.5% for the second half. Growth in Q4 was soft at 0.4% and followed a similar outcome in the previous quarter (+0.3%). Over the year, consumption growth softened to 2.0% — its slowest in 5½ years — from 2.6% as of Q3.
The details in Q4 across the retail categories continued the softness that was evident in the previous quarter. The strongest gains in percentage terms were in clothing and footwear (+2.2%) and cafes and restaurants (+0.9%). Outside of retail, new vehicle purchases fell by sharply (-1.5%) and operation of vehicles (including fuel) lifted modestly (+0.4%). Growth in spending on household services (including areas such as health and education) was slightly stronger than retail in the quarter but fairly modest.
In terms of income, growth in real household disposable income lifted by 0.6% in Q4 after declining slightly in the previous two quarters. Annual growth, though, slowed from 0.9% to just 0.4%. Weak income growth has been a persistent headwind to households in recent years and as a result, saving has been in steady decline. However, the saving ratio ticked up slightly in Q4 by 0.2ppt to a still very low level at 2.5%. A lift in household saving over the coming quarters is certainly a possibility given the risks to sentiment from declining property prices and overall household wealth, and this would weigh on the outlook for consumption growth.
Dwelling Investment (-3.4%q/q, +2.5%Y/Y) — Residential construction activity turned down sharply over the second half of the year after a robust start to 2018. New construction fell by 3.6% in Q4 and alterations declined by 3.1%. Total activity was down by 3.4% in the quarter and by around 3.0% on an annualised basis over the half. This compares to activity increasing at an annualised pace of around 5.5% through the first 6 months of the year. The rapid deterioration in building approvals, falling property prices and tight credit conditions are impacting activity notably. Residential construction can be expected to remain a headwind to growth throughout 2019.
Business Investment (+0.7%q/q, -0.2%Y/Y) — New business investment lifted by 0.7% in the quarter after declines of 1.3% in Q3 and 0.4% in Q2. The improvement was broad based across machinery and equipment (+0.2%q/q), engineering (infrastructure assets) (+1.0%q/q), building (+0.1%q/q) and intellectual property products (+1.8%q/q). Late-cycle weakness associated with the completion of major resources projects continued to weigh, though investment from the non-mining sectors lifted. Looking ahead, the drag from unwinding mining sector investment is projected to end this year and with expectations for non-mining investment on the rise, business investment is likely to be a growth driver over the next couple of years.
Public Demand (+1.6%q/q, +6.1%Y/Y) — Overall growth in Q4 and in 2018 was led by public sector demand. The detail for the quarter was mixed with consumption spending increasing by 1.8% but underlying investment softening by 0.4%. That softness for the latter should prove temporary given the elevated level of long-term infrastructure-related work in the pipeline.
Net Exports (-0.1ppt in Q3, +0.8ppt Y/Y) — Net exports were a modest drag on activity in Q4 with import volumes rising slightly (+0.1%) and exports soft (-0.7%). However, trade added notably to activity in 2018 and is expected to remain supportive this year led by the resources sector. Inventories contributed +0.2ppt to growth in the quarter.
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GDP — Q4 | Incomes: GDP (I) +0.1%q/q, +1.7%Y/Y
Q4's estimate for real GDP income lifted by 0.1%, matching the result from Q3, and was softer than the expenditure (+0.3%) and production (+0.2%) outcomes. Annual growth eased from 2.4% to 1.7%, its lowest since the March quarter of 2010, albeit impacted by a sizeable base effect.
Nominal GDP growth was solid again in Q4 at 1.2%, which lifted the annual pace from 5.1% to 5.5%. This compares with annual growth of 3.7% in Q4 2017. Rising commodity prices were a lasting theme in 2018 and has driven a strong increase in national income. The nation's terms of trade lifted by 3.2% in the quarter to be 6.1% higher over the year.
In line with those favourable conditions, private sector company profits ex-financial corporations lifted by 3.8% in Q4 to accelerate annual growth from 6.4% to 10.9%, which looks to be driven predominantly by the mining sector. In the financial sector, gross profits increased by 1.4% in the quarter and by a solid 6.8% through the year.
The compensation of employees (CoE) through wages and salaries measure posted a 0.9% increase in Q4, though the annual pace turned down to 4.3% from 4.6% and looks to have peaked in the first quarter of the year at around 5.2%. The CoE measure is impacted by hours worked, which the Bureau reported lifted by 0.4% in Q4 and by 1.5% annually after slowing over the second half of 2018.
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GDP — Q4 | Production: GDP (P) +0.2%q/q, +2.2%Y/Y
The outcome for the production estimate for GDP at 0.2% in the quarter was in the middle of the expenditure and income estimates. Annual growth eased from 2.4% to 2.2%, its slowest pace since mid-2015.
In Q4, there were declines in output recorded by agriculture, construction, manufacturing and utilities. Drought conditions continue to impact the agriculture sector with output deteriorating notably over the year.
The healthcare industry remained in first place, with the sector benefitting from strong public spending and also by households, with related employment remaining robust. The chart, below, provides the full breakdown.
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GDP — Q4 | Prices
Economy-wide inflation according to the GDP deflator posted a strong rise of 1.1% in the quarter, while the annual pace accelerated from 2.2% to 3.1%. These moves reflect the strong increase in the terms of trade in Q4. The Gross National Expenditure deflator, which is not impacted by the terms of trade, showed a subdued rise of 0.3% in the quarter and the annual pace was steady at 1.6%.
The household consumption deflator is a proxy to the more commonly known Consumer Price Index (CPI) but differs in that it reflects dynamic changes in consumer spending, that is the tendency towards lower-priced goods over time. In Q4, the household consumption deflator increased by 0.3% and by 1.6% for the year. Both of these outcomes were a moderation from Q3 at 0.5%q/q and 1.8%Y/Y. For comparison, the CPI lifted by 0.5% in the December quarter with annual growth at 1.8%.
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GDP — Q4 | Productivity
Low productivity growth has been a persistent theme in the domestic economy in recent years and that was again evident in Q4. For the third consecutive quarter, growth in total hours worked (+0.4% in Q4) exceeded the pace of output growth (+0.2%). As a result, real GDP per hour worked declined by 0.2%. Unusually, the annual pace lifted from 0.6% to 0.8%, though that reflected a base effect from Q4 last year. GDP per hour worked for the market sector (excluding the public sector) also fell by 0.2% in the quarter with annual growth very subdued at 0.7%.
Turning to the costs front, nominal non-farm unit labour costs increased by 0.8% in the quarter and by 1.3% over the year. This compared with growth of 1.3% in Q3 and 1.1% in annual terms. Though still increasing, growth in nominal non-farm unit labour costs has been slowing ever since peaking at a pace of 2.4%Y/Y in Q4 2017. Removing the impact of inflation, real non-farm labour costs declined by 0.1% in the quarter after rising by that amount in Q3. On an annual basis, real non-farm labour costs fell by 2.1% and deteriorated from -1.3% in Q3, though that includes a sizeable base effect. Declining labour costs in real terms highlights the nation's soft inflationary pulse and indicates that wages growth is still being restrained by elevated levels of excess capacity in the labour market.
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GDP — Q4 | States
It was a disappointing 4th quarter for New South Wales with demand contracting by 0.1%, though the first three quarters of 2018 were robust. This outcome was driven by soft growth in household consumption and weakness in residential construction activity. These factors pose a headwind to the state's economy in 2019. Details for business investment were mixed in Q4 with non-residential construction lifting but equipment investment was softer. Public demand through infrastructure investment remains strong.
In Victoria, demand lifted by 0.6% in Q4, though conditions moderated over the second half of the year. Growth in household consumption at 0.6% was much stronger than in New South Wales and nationally. Despite a soft result in Q4, the state continues to be supported by public sector investment in infrastructure in response to strong population growth. Business investment lifted modestly in Q4 but was strong overall in 2018. A source of weakness likely to be forthcoming is slowing residential construction activity matching with deteriorating building approvals data.
Looking at the remaining states, demand lifted solidly in Queensland by 0.9% after a weak Q3. Public demand and household consumption were the driving factors, though were moderated by weaker business investment. Demand lifted by 0.8% in South Australia, mainly due to a strong rise in public spending and investment. In Western Australia, demand contracted by 0.3% in what was a soft finish to a weak 2018. Declining business investment, notably in the mining sector, was the major factor, though residential construction also contributed. It was a solid Q4 in Tasmania, with demand increasing by 0.6% while 2018, on the whole, was robust. This was in response to broad-based support from households, business investment and public demand.
