Key uncertainties attend the outlook for the Australian economy, notably from uncertainty offshore associated with trade and geopolitical tensions, while domestically the headwinds are around ongoing slow income growth weighing on household spending, an intensifying downturn in the residential construction cycle and weakness in business investment. In response, the RBA cut the cash rate on three occasions in 2019 to a record low of 0.75%, while the Federal government announced tax relief targeted at low-and middle-income earners in April's budget. Q3's National Accounts reflect the early response from consumers to two of the RBA's rate cuts and the fiscal stimulus, though subdued confidence prompted by concerns around the economic outlook meant that the focus was on saving and paying down debt rather than spending.
The composition of growth continues to remain imbalanced between a robust public sector (1.7%q/q, 5.2%Y/Y) and weakness in private sector demand (-0.3%q/q, -0.4%Y/Y) that reflects the slowdown in household consumption growth, the residential construction downturn and declining business investment.
Growth in household consumption edged up by 0.1% in Q3; its softest quarterly outcome since Q4 2008, with the annual pace easing from 1.4% to a new post-GFC low of 1.2%. Highlighting the impact of interest rate cuts and tax relief, household disposable income growth in real terms accelerated by 2.1% in the quarter to be up by 3.1% through the year. Helping to explain why this did not flow through to spending, the household saving ratio surged by 2.1ppt to a 2½-year high at 4.8%, with subdued confidence likely playing a key role here. As such, weakness persisted in discretionary spending, which declined by 0.3% in Q3, highlighted by a notably weak outcome from vehicles (-1.0%q/q), and has stalled over the past year. Non-discretionary spending growth was 0.4% in Q3, while annual growth was maintained at 2.0%.
Residential construction activity declined for the fourth consecutive quarter with a 1.7% fall in Q3, which saw the rate of contraction in through-the-year terms steepen from -7.8% to -9.6%. The annual result of -9.6% indicates that activity across the sector is contracting at its fastest rate since mid-2012. New home building fell by 2.8% in the quarter to be down by 11.0% from a year earlier; its steepest downturn in 18 years, while renovations lifted by a modest 0.6% in Q3 as the annual decline increased from -4.1% to -7.1%.
Business investment remains weak after falling by 2.0% in Q3 and by -1.7% over the year, with offshore uncertainty and weak domestic demand conditions strong headwinds. Equipment spending fell by a sharp 4.5% in the quarter, while non-dwelling construction declined by 1.6% in Q3 in which the weaknesses centred on engineering work (-5.9%) amid a lift in building activity (+3.0%). The ABS's recent Capital Expenditure survey pointed to a less constructive outlook for investment plans in 2019/20, though the mining sector will support the economy.
Public demand led activity in Q3, supported by a 0.9% rise in consumption spending that centres on public health initiatives, while investment saw renewed strength after recent softness lifting by 5.4% in the September quarter.
Net exports added 0.3ppt to GDP growth in Q3, with export volumes up by 0.7% driven by strength in the services sector and in resources. Import volumes declined for a fifth straight quarter with a 0.2% fall in Q3 and continues to reflect the impacts of a lower Australian dollar and weak domestic demand conditions.
Link to our full review here
Link to our full review here