The key dynamics have been a weaker global economy impacted by trade and geopolitical tensions, while in Australia domestic demand has pulled back noticeably with household consumption slowing in response to enduring low income growth and weak housing market conditions, and by a downturn in the residential construction cycle. Indications are that these headwinds intensified further over the June quarter, with the median forecast for growth in Q2 at 0.5% and 1.4% in annual terms according to Bloomberg.
As it stands | National Accounts — GDP
GDP growth in the March quarter was 0.4%, which was slightly below the consensus forecast for 0.5% but an improvement on the 0.2% pace from Q4 2018. Growth over the year slowed from 2.4% to 1.8% — a pace that is essentially 1 percentage point below Australia's trend or potential growth rate of around 2.75%.
Activity in the global economy slowed through the March quarter as rising tensions between the US and China and other geopolitical uncertainties in Europe weighed on export volumes. The impact was most acutely felt in the trade-exposed manufacturing sector causing sentiment to deteriorate and, in turn, investment plans to weaken.
Amid the strengthening headwinds from abroad, the domestic economy continued to decelerate over the first quarter of 2019. The slowdown in household consumption growth intensified with consumer sentiment softening noticeably in response to an enduring period of low income growth, while already weak conditions in the housing market were accentuated by uncertainty in the lead up to the federal election weighing on discretionary spending. The residential construction cycle continued to roll over as the pipeline of work to be done, though still elevated, came down in most states — particularly in NSW following the completion of higher-density projects — while dwelling approvals were tracking sharply lower over the year.
Business investment was subdued on net in Q1 as trading conditions and confidence levels softened responding to the rising uncertainties from abroad and over the outcome of the federal election. Strength in construction in the non-mining sectors was largely offset by residual weakness in the mining sector where remaining projects moved closer to completion and this also weighed on equipment spending. Amid the backdrop of a weaker external sector, the nation's export performance was impacted by adverse weather conditions disrupting supply chains in the resources sectors, while imports declined to reflect a lower Australian dollar and, more specifically, softening domestic demand conditions. However, ongoing spending in healthcare initiatives and infrastructure investment kept strong growth in public demand in train bolstering the economy from weakness in the private sector.
Key dynamics in Q2 | National Accounts — GDP
Household consumption (+0.3% in Q1, +1.8%Y/Y) — Retail sales volumes increased by just 0.2% in Q2 and annual growth slowed to its weakest since 1991 at 0.2%. It is too early for the combined impacts from the Reserve Bank of Australia's consecutive rate cuts, tax relief for low-and middle-income earners and more buoyant housing market conditions to be reflected in these data, though they may benefit discretionary spending over the second half of the year. Despite robust gains in employment, the unemployment rate remained around 5.2% and spare capacity more broadly stayed elevated. Q2's subdued update of the Wage Price Index confirmed slow income growth remains a headwind, with consumption growth to again be driven by spending on essential goods and services.
Dwelling investment (-5.1% in Q2, -9.5%Y/Y) — The downturn in the residential construction cycle intensified in Q2, with private new home building contracting by 5.3% and alteration work falling by 3.3%. Total residential activity declined by 5.1% in the June quarter and by 9.5% over the year — its weakest annual pace since 2001.
Business investment (-0.5% in Q2, -1.0%Y/Y) — Business investment was patchy again in Q2, with weakness in buildings and structures in contrast to a solid and broad-based lift in equipment spending. Softness was evident in non-mining investment reflecting increased uncertainty over domestic and global economic conditions.
Public demand (+1.5% in Q2, +5.1%Y/Y) — Growth in public demand remains strong, rising by 1.5% in Q2, which is likely to add around 0.4ppt to activity in the quarter. The details were mixed with spending up by 2.7% driven by health initiatives, while investment declined by 3.2% despite a robust pipeline of electricity and transport-related projects that are required to support population growth in the capital cities.
Inventories (-0.9% in Q2, -0.3%Y/Y) — Inventories recorded a sharper-than-expected fall in Q2 and could subtract around 0.4ppt from GDP growth. The weakness was broad based across mining, manufacturing, wholesalers, retail and accomodation and food services.
Dwelling investment (-5.1% in Q2, -9.5%Y/Y) — The downturn in the residential construction cycle intensified in Q2, with private new home building contracting by 5.3% and alteration work falling by 3.3%. Total residential activity declined by 5.1% in the June quarter and by 9.5% over the year — its weakest annual pace since 2001.
Business investment (-0.5% in Q2, -1.0%Y/Y) — Business investment was patchy again in Q2, with weakness in buildings and structures in contrast to a solid and broad-based lift in equipment spending. Softness was evident in non-mining investment reflecting increased uncertainty over domestic and global economic conditions.
Public demand (+1.5% in Q2, +5.1%Y/Y) — Growth in public demand remains strong, rising by 1.5% in Q2, which is likely to add around 0.4ppt to activity in the quarter. The details were mixed with spending up by 2.7% driven by health initiatives, while investment declined by 3.2% despite a robust pipeline of electricity and transport-related projects that are required to support population growth in the capital cities.
Inventories (-0.9% in Q2, -0.3%Y/Y) — Inventories recorded a sharper-than-expected fall in Q2 and could subtract around 0.4ppt from GDP growth. The weakness was broad based across mining, manufacturing, wholesalers, retail and accomodation and food services.
Net exports (+0.6ppt in Q2, +0.9ppt yr) — Net exports are expected to add a sizeable 0.6ppt to GDP growth in Q2. Driven by resources, export volumes increased by 1.4% in the quarter, while imports fell by 1.3% reflecting weak domestic demand conditions. An escalation in iron ore prices (which has retraced more recently) and a lower Australian dollar drove a 1.4% rise in the terms of trade in Q2 providing a boost to national income.
