Preview: Australian Q4 GDP
Australia's December quarter National Accounts are scheduled to be released by the ABS 11:30am (AEDT) today. Estimates for GDP growth in Q4 are situated around 0.3 to 0.4%. For more than a year now, the Australian economy has been losing momentum as a protracted slowdown in the global economy and domestically-generated headwinds have combined to hold back activity. From an above-trend pace of 3.2% at the end of the second half of 2018, GDP growth had decelerated to 1.7% by the end of the September quarter of 2019 to be around its weakest in the decade since the GFC. The dynamics driving this slowdown have been persistent uncertainty offshore in response to trade and geopolitical tensions, weakness in domestic demand with households reining in spending following years of slow wages growth, a downturn in the residential construction cycle and businesses scaling back investment plans, while farm output has been severely impacted by drought conditions.
As it stands | National Accounts — GDP
GDP growth in the September quarter was 0.4%, which was slightly softer than anticipated (0.5%), as the annual pace edged up from 1.6% to 1.7% to be fractionally outpacing the rate of population growth (1.5%). While the pace of growth is languishing well below trend (around 2.75%), the Reserve Bank of Australia (RBA) has for some time fundamentally assessed the domestic economy to be passing through a "gentle turning point" ahead of pick up towards the end of 2020, though this outlook has been made notably more complicated by the nation's summer bushfires and the coronavirus outbreak in China.
Global growth in the OECD economies remained soft in Q3 rising by 0.3% as annual growth held steady at 1.6%. A material slowing in global activity ensued from the second half of 2018 in response to the emergence of trade tensions, mainly between the US and China, and as geopolitical uncertainties in the UK, Europe and the Middle East unsettled confidence. These headwinds severely impacted activity and investment plans in the global manufacturing sector that was in the midst of its deepest downturn in 7 years, though the more domestically-focused services sector had generally remained resilient.
This challenging and uncertain offshore backdrop increased the intensity of the headwinds faced by the Australian economy. At the forefront is a household sector that has ratcheted consumption spending down to its weakest pace in more than a decade (1.2%yr) as confidence in the outlook deteriorated on the expectation that slow wages growth had become more entrenched and was unlikely to pass in the near term. Household disposable income did at least see a sharp 2.5% rise in Q3 in response to earlier monetary and fiscal stimulus measures but with debt levels high and sentiment waning, households remained reticent to spend as the saving ratio surged up by 2.1ppt to 4.8% to a 2½-year high. The resumption of the RBA's easing cycle from earlier in 2019 had also been key in supporting an emerging upswing in national house prices by Q3 after a near two-year-long downturn, driven mostly by the Sydney and Melbourne markets. While supportive of the outlook further out, the downturn in the residential construction cycle intensified in Q3 with new home building contracting at its fastest pace in 18 years, reflecting a deterioration in dwelling approvals through 2018 and much of 2019.
Business investment remained weak through the year to Q3, weighed by the ongoing unwind in the mining sector as large-scale LNG projects moved closer towards completion, while investment from the non-mining sector was subdued in response to soft domestic demand conditions and an uncertain global backdrop. The combined weakness in household consumption, residential construction and business investment resulted in private sector demand falling by 0.3% in Q3 to -0.4% in annual terms to be contracting by its most since the GFC. In contrast, public demand was the leading contributor to activity in Q3 and over the past year, rising by 1.7% in the September quarter and by 5.2% in annual terms, supported by healthcare-related spending. Economic activity was also bolstered by net exports in Q3 (+0.2ppt) and through the year (+1.1ppt) on strength in resources and services exports, the latter helped notably by a weaker Australian dollar, as import volumes pulled back in line with the weakness in domestic demand conditions.
Key dynamics in Q4 | National Accounts — GDP
Household consumption — A more constructive outturn from retail sales volumes came through in Q4 rising by 0.5%, which was its strongest quarterly result since Q2 2018, likely driven by a Black Friday-related boost. While an upswing in house prices continued to emerge and stimulus from RBA rate cuts and tax offset payments combined to generate a 2.5% tailwind for household disposable income growth in Q3, a deterioration in consumer sentiment over Q4 is likely to have meant that the focus remained on saving and paying down debt. In addition, the summer bushfires and related smoke haze across several major capital cities is also likely to have weighed on spending as consumers opted to stay at home. Employment growth stepped down in December quarter after a robust Q3 and with participation near to record highs, spare capacity in the labour market remained elevated and ensured slowed wages growth persisted.
Dwelling investment — The residential construction cycle saw renewed weakness in the final three months of 2019 as activity contracted by 4.6% in Q4 to be down by 12.6% through the year, with the sector mired in its sharpest downturn since 2001. The weakness in Q4 was centred on an accelerated decline in new home building (-5.1%qtr), though alteration work also fell (-1.2%qtr).
Business investment — Strong headwinds from weak confidence, soft domestic demand conditions and an uncertain global backdrop continued to weigh on business investment as capital expenditure declined by 2.8% in Q4 to be down by 5.8% through the year. The wind-down in mining investment from its peak in the early part of the decade appeared to be close to the end of the line but non-mining investment was weakening.
Public demand — Growth in underlying public demand was softer than anticipated in Q4 rising by 0.3%. This was supported by a 0.7% rise in public spending, which centres on health-related initiatives, as investment weakened (-1.3%).
Inventories — After adding modestly to activity in Q3, inventories are likely to contribute around 0.2ppt to GDP growth in Q4. Strength in mining and utilities inventories offset weakness elsewhere.
Net exports — After making a modest contribution to activity in Q3 (+0.2ppt), net exports will contribute 0.1ppt to GDP growth in Q4. Export volumes were flat in Q4, while imports declined by 0.5%. Meanwhile, the terms of trade fell by 5.3% in the quarter on weaker commodity prices.
