Momentum in the Australian economy continued to slow over the December quarter coming after activity was softer than expected in Q3. This looks to be broadly based, with the household sector constrained by weak income growth and concerns around a wealth effect from falling property prices, and weakness in the more cyclical areas of the economy in residential construction and business investment with the overlay of tight credit conditions.
As it stands | GDP
Growth in the domestic economy was +0.3% in the September quarter, a sizeable disappointment on the +0.6% outcome that was forecast. Annual growth slowed to an around-trend pace of 2.8% from 3.1%. The slowdown largely reflected lower growth in household consumption, with notable weakness in the discretionary areas of spending.
In a development that would become increasingly clear over the ensuing months, residential construction showed early signs of weakness after a robust period of activity through the first half of 2018. Meanwhile, business investment continued to weigh on growth reflecting late-cycle weakness associated with the completion of major resources projects.
Public demand continued to bolster growth supported by consumption spending and an elevated level of investment in infrastructure-related projects. Trade also supported growth in Q4, though the underlying detail was weak.
Today, the median forecast according to Bloomberg looks for growth in the quarter of 0.3%. As of last Friday, the median expectation was for growth of +0.5%, however soft partials from Business Indicators and net exports released earlier this week have resulted in a downgrade. Assuming no revisions to previous quarters, annual growth is expected to slow to 2.5% from 2.8%.
Slower growth is anticipated by the Reserve Bank of Australia (RBA). The Bank lowered its growth forecast for Q4 from 3.25%Y/Y to 2.75%Y/Y in February's Statement on Monetary Policy. However, even after allowing for that downgrade, growth in Q4 would need to print at +0.6% — twice the market expectation — for its forecast to be achieved.
What to look for | GDP
The key aspect of these National Accounts is around the household sector, in particular consumption and income growth. Consumption growth has been quite volatile from quarter to quarter over recent times, though has remained relatively resilient in annual terms despite the persistent headwind from weak income growth over the past few years. As a direct consequence, the household saving ratio has been in a steady decline to around pre-financial crisis levels.
In that situation, the downturn in national property prices that has extended for more than 12 months has been a significant development and has highlighted the potential vulnerability of the household sector to a wealth effect. A lift in the saving ratio would be consistent with signs that households are reducing consumption in response to the deterioration in their wealth through declining property prices.
The RBA continues to highlight its view that household income growth is more pertinent to consumption growth than wealth effects. Growth in wages according to the Wage Price Index has been lifting very gradually over recent quarters so it will be critical to see if this is flowing through to household incomes.
