Momentum in the Australian economy continued to ease in 2019
following a sharp slowdown over the second half of 2018. The key dynamics
include further weakness in household consumption due to persistently slow
income growth, negative wealth impacts from falling property prices and tight
credit conditions, a downturn in the residential construction cycle and subdued
business investment. Slower global growth prompted by continuing trade tensions
is the key headwind from abroad.
In seasonally adjusted terms, real GDP growth increased by 0.4% in
Q1, which was slightly below the median forecast for +0.5%, while the annual pace
came in as expected at 1.8% -- its lowest in 9½ years -- after slowing from an upwardly revised rate of
2.4% for the year to Q4. Output growth has slowed to around 1ppt below
Australia's trend or potential pace of around 2.75%.
The Reserve Bank of Australia forecasts annual GDP growth to ease
to 1.7% by mid-2019 before picking up over the second half to 2.6% by year's
end. The RBA Board lowered the official cash rate by 25 basis points to 1.25%
at its June meeting, with financial markets pricing in around another 40 basis
points of easing by end 2019.
— — —
GDP — Q1 | Expenditure: GDP (E) +0.2%q/q, +2.1%Y/Y
Household consumption (+0.3%q/q, +1.8%Y/Y) — Growth in household consumption slowed further in the first
quarter of 2019 as the annual pace softened from 2.0% to a near 6-year low at
1.8%. The 4-quarter growth profile was 0.8% (Q2 '18), 0.3% (Q3 '18), 0.4%
(Q4 '18) and 0.3% (Q1 '19) indicating that the softness set in over the second half of last year and continued into 2019. (click charts to expand)
Weakness in discretionary spending intensified falling by
0.1% in Q1 easing annual growth to 1.0% from 1.2%. In particular,
that was weighed by retail spending on clothing and footwear (-0.6%q/q),
furnishings and household equipment (-0.4%q/q), recreation (-0.5%q/q) and cafes
and restaurants (-0.4%). In contrast, non-discretionary spending increased by
0.5% over Q1, though annual growth eased to 2.3% from 2.5%. In Q1, that
included rises in utilities (1.7%), health (0.7%), rents (0.6%) and education
(0.3%).
The weakness in discretionary spending is driven by persistently slow income
growth. Real growth in household disposable income lifted by 0.5% in
Q1 and followed a 0.6% gain in Q4. Though subdued, these outcomes are
an improvement on recent quarters. As a result, base effects saw annual growth
in disposable income lift from 0.4% to 0.8%. The household saving ratio
increased for the second consecutive quarter, rising by 0.2ppt to 2.8%. Given
weak income growth and the negative wealth impact from falling property prices,
households have cut back on discretionary spending, in turn resulting in a
slight lift in saving.
Dwelling investment (-2.5%q/q, -3.1%Y/Y) — The residential construction cycle began to turn down in Q3 2018, with further weakness occurring in 2019 as activity contracted by 2.5% in the quarter. The annual pace has swung from +3.5% in Q4 to -3.1% in Q1. Both new building (-1.8%q/q, -3.1%Y/Y) and alterations (-3.8%q/q, -3.0%Y/Y) are firmly in decline. With dwelling approvals deteriorating for much of the past year, residential construction activity can be expected to remain a drag on output.
Business investment (+0.5%q/q, -1.3%Y/Y) — Underlying business investment lifted modestly in Q1 but is softer through the year. The detail for the quarter was mixed; non-dwelling construction rising by 1.3% (building +4.5% and engineering -1.5%), intellectual property up by 1.0%, while equipment investment fell by 0.3%. The declines from engineering and equipment likely reflect residual weakness from the resources sector as major projects near completion. The recent ABS Capital Expenditure survey pointed to investment from both the non-mining and mining sectors lifting in 2019/20 and adding to economic activity.
Public demand (+0.8%q/q, +5.5%Y/Y) — Activity continues
to be supported by a strong public sector. Consumption spending is driven by
the rollout of the NDIS and other initiatives relating to health and aged care
services. Meanwhile, investment is firmly on the rise driven by an elevated
pipeline of infrastructure projects.
Net exports (+0.2ppt in Q4, +0.5ppt yr) — Net trade added 0.2ppt to growth in Q1, which reversed
subtraction in Q4 of 0.2ppt. Export volumes lifted by 1.0% in the quarter after
improving from a 0.5% decline in Q4, with growth over the year subdued at 1.7%
in response to supply disruptions in the resources sector. Import volumes
contracted by 0.1% in Q1 and by 0.5% over the year in line with soft domestic
demand. Meanwhile, inventories were a surprise drag in Q1 (-0.1ppt) but were
flat through the year.
— — —
GDP — Q1 | Incomes: GDP (I) +0.5%q/q, +1.5%Y/Y
Q1's estimate of real GDP income growth was 0.5%, in line with the
production estimate and stronger than the expenditure outcome (+0.2%). The
annual pace softened to 1.5% from 1.8% driven by a base effect.
Australian nominal GDP growth posted a 1.4% rise in Q1 -- the
strongest outcome in a year --however, a base effect saw the annual pace ease
from 5.5% to 4.9%. At its current 4.9% pace, national income growth has risen
by 1.1ppts above its recent low from Q4 2017 (3.8%). Rising commodity prices
are a strong tailwind, with the nation's terms of trade rising by another 3.1%
in March quarter following a 3.0% lift in Q4. Growth through the year has swung
to +6.1% compared to a 3.1% drag from a year earlier.
This has had a direct flow through to the corporate sector and notably so for mining companies. Private sector company profits (excluding financial
corporations) increased by 3.9% in Q1 after a 3.7% lift in Q4. In year-on-year
terms, profit growth moderated from 11.5% to 11.0% but has accelerated from a 2.8% pace in Q1 2018. Profitability in the financial sector continues to
grow at a more modest but still solid rate, rising by 1.9% in the quarter to
7.2% through the year.
The Compensation of Employees measure (including wages and
salaries) saw a 1.2% elevation over Q1, which firmed annual growth from 4.1% to
4.3%, though that is well down from the recent peak of 5.1% from a year
earlier. The increase in Q1 can be explained by a strong lift in hours worked,
which the Bureau reported increased by 1.0% over the quarter that drove an
acceleration in the annual pace from 1.6% to 2.8%.
— — —
GDP — Q1 | Production: GDP (P) +0.5%q/q, +1.8%Y/Y
The production estimate for GDP was 0.5% in Q1 matching with the income estimate and above the expenditure outcome (+0.2%). The annual pace slowed further from 2.2% to 1.8% to its lowest since Q4 2009.
Four industries dragged on output in Q1; agriculture (-0.2%),
construction (-0.9%), accommodation and food services (-0.2%) and real estate
services (-0.4%). The impact of drought conditions has severely impacted output
in the agriculture sector over the past year. Construction output has also
contracted noticeably across the year following three consecutive quarterly
declines due to the residential cycle turning down.
At the other end of the scale, the health sector remains well
clear at the top of the ladder driven by public spending associated with the
NDIS and aged care initiatives, while consumer demand remains robust. Separate
ABS data shows that employment growth continues in the sector, though now at a
more moderate rate after a sharp run-up in 2017 and 2018. The chart, below,
shows the industry-by-industry breakdown.
— — —
GDP — Q1 | Prices
As measured by the GDP deflator, economy-wide inflation posted a
1% rise in Q1 to match the outcome from Q4. The annual pace was little changed
at 3.0% from 3.1%, though sharply higher than a year earlier at 0.7%. The
predominant factor here is the rise in the terms of trade. Abstracting for that
impact, the Gross National Expenditure deflator shows that pricing pressures
continue to be subdued at just 0.3% in the quarter and 1.6% over the year.
The headline Consumer Price Index (CPI) stalled in Q1 (0.0%) with
the annual pace slowing sharply from 1.8% to 1.3%. The closest proxy in the
National Accounts is the Household Consumption Deflator, which showed a 0.3%
lift in Q1 while annual growth saw a more modest slowing compared to the CPI,
easing from 1.7% to 1.5%. The Household Consumption Deflator is based on
dynamic consumer spending rather than the fixed basket methodology in the CPI.
— — —
GDP — Q1 | Productivity
National productivity growth fell away to an 8-year low in Q1.
Growth in total hours worked at 1.1% in the quarter vastly exceeded output
growth of 0.4%, which resulted in real GDP per hour worked falling by 0.5%,
sending the annual pace to -1.0% from +0.8%. GDP per hour worked in the market
sector (excludes the public sector) fell for the third consecutive quarter
contracting by -0.4%, as the annual pace turned negative at -0.9% from
+0.7%. Real GDP growth on a per capita basis fell by 0.03% in Q1 -- its
third straight quarterly contraction -- with the annual pace sliding from 0.7%
to 0.1% marking its lowest since Q2 2013.
On the costs front, nominal non-farm unit labour costs were flat
in Q1, though the annual pace lifted from 1.2% to 1.6% reflecting a base effect
as the outcome from Q1 2018 (-0.4%) fell out of the calculation. Costs remain
well down from the recent peak of 2.4% in year-on-year terms to Q4 2017.
Adjusting for inflation, real non-farm units labour costs continue to fall with
a sizeable 1.1% decline Q1 to be 1.7% lower through the year, however that was
an improvement on the 2.3% deterioration for the year to Q4. With labour costs
in real terms continuing to slide, this will constrain the nation's inflationary
pulse and indicates that excess capacity in the labour market remains
elevated.
GDP — Q1 | States
Demand in New South Wales lifted by 0.4% in Q1 recovering from a
0.1% contraction in Q4, though growth in annual terms continues to ease and is
now 2.1% -- its slowest in 6½ years. Conditions in the household sector are subdued with
consumption growth sliding to an annual pace of 1.8% from 2.5% a year ago, which
is a response not only to low income growth but also to sharp declines in
property prices. The state is noticing the impact of the rollover in the
residential construction cycle with activity across building and alterations
down by a combined 7.8% through the year. In offset, business investment is
solid at 4.6% over the year bolstered by non-residential construction. There is
also considerable support from public demand.
In Victoria, demand increased by a modest 0.2% in the quarter
slowing the annual pace from 5.4% to 3.0% -- a 5½-year low. Household consumption growth slowed further to 2.6%
in annual terms to be down by a full percentage point from Q1 2018. Similar
dynamics are in play as in New South Wales around wealth effects from falling
property prices, though to a lesser extent so far. This is evident in
residential construction activity, which while weakening at a sharp rate is
still modestly higher over the year at 0.9%. Business investment was robust
rising by 6.0% over the year driven by non-residential construction and
equipment spending. Public demand remains solid and will continue to drive
activity in the state given its strong pipeline of projects.
Looking at the other states, demand in Queensland remains contained at 0.5% in
Q1 and 1.4% for the year. A weak household sector is evident, while business
investment continues to fall. Public investment has been lifting providing some
offset. In South Australia, demand contracted by 0.2% in the quarter slowing
the annual pace to 1.8% -- its softest in nearly 3 years. This reflects slowing
household consumption and declining residential construction activity. It was
another tough quarter in Western Australia with demand falling by 0.3% taking
annual growth to -1.4%, albeit rising from -1.9%. The state is under pressure
from declining business investment, mostly from the mining sector but also from
weakness in residential construction. Tasmania posted the strongest lift in
demand of all states in Q1 at 0.7%, though the annual pace moderated to
5.0% from 6.5%. The household sector was weak in the quarter (-0.3%), but that
was overcome by strength from business investment and public demand.
