Year 2018 was one of two halves for the Australian economy; output growth was running at a strong 4% annualised pace through the first half, before slowing sharply to an annualised 1% pace for the second half. This reflected a weakening in the global economy, prompted by a slowdown in China and reduced international trade volumes due to geopolitical tensions, while domestically the key factors were a softening household sector constrained by persistently slow income growth, declining net wealth due to the housing market correction and high debt levels, and by a turn in the residential construction cycle brought on by a deterioration in dwelling approvals with supply now closer in alignment with pent-up demand, tight lending conditions, and falling property prices.
As it stands | GDP
GDP growth in the December quarter was 0.2% and 2.3% through the year; these outcomes were lower than expected at 0.3% for the quarter and 2.5% on a year-ended basis and slower than in Q3 at 0.3% and 2.7% year-on-year. At an annual pace of 2.3%, output growth can be characterised as having fallen well below Australia's trend or potential rate (around 2.75%).
The household sector was weak in Q4 and overall soft in 2018. Growth in consumption spending slowed to just a 2.0% pace through the year. Expectations for continued slow growth in income weighed on discretionary spending, while weak housing market conditions suppressed demand for household related items such as furniture and appliances.
Business investment stalled last quarter and was a net drag on output through the year. Investment in the mining sector unwound further reflecting the nearing completion of major LNG projects, though investment lifted in aggregate across the non-mining sector supported by construction and equipment spending. The residential construction cycle peaked in Q2 2018 and began to rollover over during the second half, including a 0.2ppt subtraction in Q4.
The external sector was a modest drag in Q4, though net trade added notably to growth in 2018 reflecting the increased productive capacity in the resources sector and strengthening demand for tourism and education services, particularly from Asia.
Market expectations | GDP
In today's release, we can expect to see that GDP growth has slowed further since the turn of the year. The median forecast compiled by Bloomberg looks for growth of 0.4% in the quarter, with the annual pace easing to 1.8%. In comparison, the Reserve Bank of Australia (RBA) is forecasting GDP growth to slow to 1.7% for the year to Q2.
The forecast for slower growth in Q1 is driven by the weakness in the partial indicators, including a contraction in retail spending, residential construction activity slowing further and a decline in business investment. Activity is supported by inventories (see here), public demand and net exports (see here) and likely by spending on household services.
What to watch | GDP
Key in today's National Accounts is the household sector, which accounts for around 60% of the domestic economy. Household consumption growth is likely to have eased further in 2019 from its already soft 2.0% annual pace as retail spending, most notably in the discretionary categories, declined in response to ongoing slow wages growth and property price falls.
Spending on household services (such as health, education and utilities) and other essentials (food and housing) make up around 70% of household consumption and is likely to remain reasonably firm. With consumption growth slowing closer towards income growth, the saving ratio is likely to be little changed through the quarter around its very low level, though these components have also been subject to significant revision over recent quarters.
