As it stands | National Accounts — GDP
GDP growth in the June quarter was 0.5%, matching both the consensus forecast and the outcome from Q1. Through the year, growth eased from 1.7% to a new post-GFC low of 1.4% and is below the rate of population growth (1.6%). Australia's trend or potential rate of growth is estimated to be around 2.75%. The recent momentum has at least improved somewhat; output growth was tracking at around a 1% annualised pace over the second half of 2018 but firmed to around a 2% annualised pace over the first half of this year. The RBA assessed this development as a sign the domestic economy may have reached a "gentle turning point".
Activity in the global economy slowed further over the first half of 2019 as trade tensions, most notably between the US and China, and geopolitical uncertainties in the UK and in Europe intensified. In response, global trade flows weakened sharply and investment plans from firms were scaled back as sentiment deteriorated. These impacts were most pronounced within the global manufacturing sector, which slid into its deepest contraction in around 7 years in the first half. Meanwhile, activity in the more domestically-focused services sector also slowed but remained in a modest expansionary phase.
These headwinds from offshore continued to set a challenging backdrop for the Australian economy over the first half of 2019. Growth in household consumption — the largest component of the domestic economy — slowed to its weakest annual pace in 6 years at 1.4% as low wages growth, a focus on paying down debt and subdued confidence weighed on spending, particularly in discretionary areas. Early indications were that stimulus from RBA rate cuts and tax relief to low-and middle-income earners was yet to gain traction with consumer spending, though conditions in the established major property markets in Sydney and Melbourne improved notably once the hurdle of May's federal election was cleared. In contrast, the deceleration in the residential construction cycle gathered pace with activity contracting by more than 9% over the year and was broadly based across the states, while dwelling approvals continued to weaken over the first half.
Weakness in business investment persisted into 2019 falling by 1.6% over the year to Q2 weighed by the wind-down from completing projects in the LNG sector. Non-mining business investment lifted modestly over the past year supported by demand for machinery and equipment in the services sector, though at the same time non-residential construction activity softened. Against weakness in global trade, Australia has been relatively insulated due to strength in resource and services exports and by a depreciation of the domestic currency. In line with weak private sector demand, import volumes contracted by around 3% over the past year. Elevated commodity prices continued to generate a tailwind for national income growth and drove Australia to its first current account surplus since the mid-1970s in Q2, providing fiscal authorities with scope for infrastructure investment to support robust population growth in the capital cities and spending on public health initiatives.
Key dynamics in Q3 | National Accounts — GDP
Household consumption — Retail sales volumes contracted by 0.1% in Q3 and fell by 0.2% over the past year to be at its weakest pace since 1991. Recent stimulus from RBA rate cuts and tax relief to low-and middle-income earners had yet to gain traction in supporting discretionary spending, which is a likely response to a weakening in consumer sentiment over the quarter prompted by concerns over the near-term economic outlook. Slow wages growth also persisted as a headwind for households. In spite of robust employment growth over Q3, the unemployment rate was little changed at 5.2% and spare capacity more broadly remained elevated as participation lifted to a record-high level. Spending on essential goods and services is likely to again drive household consumption growth in the quarter.
Dwelling investment — The downturn in the residential construction cycle continued at pace in Q3 as new home building by the private sector contracted by 3.4% to be down by 10.7% over the year. Renovation work was broadly flat in Q3 but fell by 7.9% on a year earlier. In total, private residential construction activity contracted by 3.0% in Q3 and by 10.4% through the year, making this the sharpest downturn the sector has encountered in 18 years.
Business investment — Private sector capital expenditure declined by 0.2% in Q3 to be down by 1.3% over the year. Business investment is facing headwinds from uncertainty offshore and weak domestic demand conditions. This is having a notable impact on investment from the non-mining sector, though an improving mining sector is providing some offset.
Public demand — Strong growth in public demand continued in Q3 rising by 1.5%. Public spending was up by 0.9% in the quarter and is supported by health and aged care initiatives. Meanwhile, there was renewed strength in underlying investment after a recent period of softness rising by 3.8% in Q3.
Inventories — For the second straight quarter inventories contracted, falling by 0.4% in Q3 led by the retail and manufacturing sectors. However, this was well below the 1.0% contraction recorded in the June quarter and thus inventories are expected to contribute modestly to GDP growth in Q3 by around 0.2ppt.
Net exports — After a 0.6ppt contribution in Q2, net exports added a relatively modest 0.2ppt to activity in Q3. Export volumes lifted by 0.7% in the quarter, while imports showed continued weakness (-0.2%) in response to a lower Australian dollar and soft domestic demand conditions.
These headwinds from offshore continued to set a challenging backdrop for the Australian economy over the first half of 2019. Growth in household consumption — the largest component of the domestic economy — slowed to its weakest annual pace in 6 years at 1.4% as low wages growth, a focus on paying down debt and subdued confidence weighed on spending, particularly in discretionary areas. Early indications were that stimulus from RBA rate cuts and tax relief to low-and middle-income earners was yet to gain traction with consumer spending, though conditions in the established major property markets in Sydney and Melbourne improved notably once the hurdle of May's federal election was cleared. In contrast, the deceleration in the residential construction cycle gathered pace with activity contracting by more than 9% over the year and was broadly based across the states, while dwelling approvals continued to weaken over the first half.
Weakness in business investment persisted into 2019 falling by 1.6% over the year to Q2 weighed by the wind-down from completing projects in the LNG sector. Non-mining business investment lifted modestly over the past year supported by demand for machinery and equipment in the services sector, though at the same time non-residential construction activity softened. Against weakness in global trade, Australia has been relatively insulated due to strength in resource and services exports and by a depreciation of the domestic currency. In line with weak private sector demand, import volumes contracted by around 3% over the past year. Elevated commodity prices continued to generate a tailwind for national income growth and drove Australia to its first current account surplus since the mid-1970s in Q2, providing fiscal authorities with scope for infrastructure investment to support robust population growth in the capital cities and spending on public health initiatives.
Household consumption — Retail sales volumes contracted by 0.1% in Q3 and fell by 0.2% over the past year to be at its weakest pace since 1991. Recent stimulus from RBA rate cuts and tax relief to low-and middle-income earners had yet to gain traction in supporting discretionary spending, which is a likely response to a weakening in consumer sentiment over the quarter prompted by concerns over the near-term economic outlook. Slow wages growth also persisted as a headwind for households. In spite of robust employment growth over Q3, the unemployment rate was little changed at 5.2% and spare capacity more broadly remained elevated as participation lifted to a record-high level. Spending on essential goods and services is likely to again drive household consumption growth in the quarter.
Dwelling investment — The downturn in the residential construction cycle continued at pace in Q3 as new home building by the private sector contracted by 3.4% to be down by 10.7% over the year. Renovation work was broadly flat in Q3 but fell by 7.9% on a year earlier. In total, private residential construction activity contracted by 3.0% in Q3 and by 10.4% through the year, making this the sharpest downturn the sector has encountered in 18 years.
Business investment — Private sector capital expenditure declined by 0.2% in Q3 to be down by 1.3% over the year. Business investment is facing headwinds from uncertainty offshore and weak domestic demand conditions. This is having a notable impact on investment from the non-mining sector, though an improving mining sector is providing some offset.
Public demand — Strong growth in public demand continued in Q3 rising by 1.5%. Public spending was up by 0.9% in the quarter and is supported by health and aged care initiatives. Meanwhile, there was renewed strength in underlying investment after a recent period of softness rising by 3.8% in Q3.
Inventories — For the second straight quarter inventories contracted, falling by 0.4% in Q3 led by the retail and manufacturing sectors. However, this was well below the 1.0% contraction recorded in the June quarter and thus inventories are expected to contribute modestly to GDP growth in Q3 by around 0.2ppt.
Net exports — After a 0.6ppt contribution in Q2, net exports added a relatively modest 0.2ppt to activity in Q3. Export volumes lifted by 0.7% in the quarter, while imports showed continued weakness (-0.2%) in response to a lower Australian dollar and soft domestic demand conditions.
