In review: Australian Q4 GDP; subdued ahead of Q1 headwinds

The Australian economy will head towards a bushfire- and coronavirus-induced slowdown in Q1 2020 with subdued momentum as real GDP growth in seasonally adjusted terms increased by 0.5% in the December quarter, slightly more than the 0.4% median estimate. Annual growth improved from 1.8% to 2.2% but remains well below the nation's potential rate of around 2.75%. In response to the upcoming slowdown, the Reserve Bank of Australia (RBA) announced a 25 basis point cut in the cash rate to 0.5% at its March policy meeting, with the Board prepared to ease further if required. The Federal government has also given indications that it will be forthcoming with measures to support the economy, likely to be  targeted at the sectors set to be heavily impacted such as tourism and education services. The coronavirus outbreak has resulted in a material downgrade to the global growth outlook, with the OECD forecasting a reduction of 0.5ppt in activity from its previous estimate of 2.9% to 2.4% in 2020. This prompted global central banks to show a willingness to support their economies through the impending slowdown, highlighted the US Federal Reserve delivering an inter-meeting rate cut of 50 basis points.   

With the global headwinds set to intensify, the domestic economy is in a relatively fragile position. Domestic demand growth is subdued (0.1%q/q, 1.3%Y/Y) and continues to be centred on public demand (0.1%q/q, 5.1%) amid ongoing weakness in private demand (0.1%q/q, 0.1%Y/Y), with household consumption growth soft on a delayed response to earlier stimulus, residential construction in a downturn and business investment absent. Net exports have been a key support for the nation through this period, but that is set to roll over in Q1 due to the disruptions caused to global supply chains, most notably in China, from the coronavirus outbreak.   

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GDP — Q4 | Expenditure: GDP (E) 0.4%q/q, 2.3%Y/Y

Household consumption (0.4%q/q, 1.2%Y/Y) — In Q4, household consumption advanced by 0.4%, stronger than in the previous two quarters, though annual growth held steady at 1.2%, which is its equal lowest since the GFC. 

Looking at the profile, non-discretionary spending continues to lead (0.5%q/q, 1.9%Y/Y), though discretionary saw a rebound in Q4 (0.3%q/q, 0.3%Y/Y) that was likely associated with a boost from Black Friday promotional sales. Most notably, this flowed through to clothing and footwear (2.1%q/q, 2.2%Y/Y) and furnishings and household equipment (1.3%q/q, 2.1%Y/Y).  

On incomes, household disposable income growth declined by 0.4% in Q4, slowing annual growth from 5.0% to 3.6%. In real terms, disposable incomes fell by 0.7% in the quarter, which moderated the annual pace from 3.1% to 1.9%. This is in the context of a sharp rise in disposable incomes in Q3 driven by RBA rate cuts and tax offset payments from the Federal government. The household saving ratio saw a sharp 2.2ppts rise in Q3 but in Q4 it declined by 1.2ppts from 4.8% to 3.6%, possibly reflecting some use of Q3's income boost, though weakness in consumer confidence is still likely to weigh on spending.  

Dwelling investment (-3.4%q/q, -9.7%Y/Y) — Residential construction activity contracted for a sixth consecutive quarter with a 3.4% fall in Q4, steepening the annual decline from -8.7% to -9.7%, with the sector mired in its sharpest downturn in more than 7 years. New home building pulled back by 4.1% in the quarter to -12.2% over the year and is contracting by its most since the GST-induced slowdown in 2001. This was accentuated by a 2.2% fall in alteration work in Q4, which was 5.0% lower through the year. The ongoing downturn in the residential construction cycle reflects substantial weakness in dwelling approvals from mid 2018 through 2019. As a side note, ownership transfer costs (excluded from the dwelling investment figures and relating to fees associated with real estate transactions) surged by 12.3% in Q4, adding 0.2ppt to overall activity, reflecting the rebound in the national housing market over the second half of 2019.  

   

Business investment (-0.8%q/q, -1.2%Y/Y) — The dynamics for business investment in Australia are clearly challenging as weakness in confidence and uncertainty over the domestic and global economic outlook weigh on capital expenditure plans. After a 1.1% contraction in Q3, business investment, on net, fell by a further 0.8% in the December quarter to be down by 1.2% over the year. This was driven by a 3.3% contraction in non-dwelling investment in Q4, with weakness in both building (-3.0%) and engineering (-3.6%), though over the past year building advanced modestly (4.6%) while there was a substantial pullback from engineering (-12.6%). Machinery and equipment investment lifted by 0.9%, moderating the annual decline from -2.7% to -1.0%. With large-scale LNG projects now complete, mining investment advanced by 5.0% in Q4, swinging annual growth from -8.9% to 3.2%. In contrast, non-mining investment contracted by 3.6% in the quarter and by 2.7% over the year.   

Public demand (0.1%q/q, 5.1%Y/Y) — Over the past year, public demand was the leading contributor to overall activity adding 1.2ppts to GDP growth. That has been centred on public spending (+1.0ppts) relating to health and aged care initiatives, with a more modest contribution coming through from investment (+0.2ppt). In Q4, growth in public demand was broadly flat (0.1%) but was up by a robust 5.1% through the year. Spending posted a 0.7% rise in the quarter (5.3%yr) but was moderated by a 2.3% fall from investment (4.2%yr). 

Net exports (0.1ppt in Q4, 1.1ppt yr) — In addition to public demand, net exports have been a key support to the domestic economy over the past year adding 1.1ppts to GDP growth. In Q4, the contribution was a modest 0.1ppt as export volumes flatlined (3.4%yr) after recent strength and imports contracted by 0.5% (-1.5%yr) in response to a noticeably weaker Australian dollar.  

Inventories (0.2ppt in Q4, 0.0ppt yr) — Inventories added 0.2ppt to GDP growth in Q4 driven by a run-up in the mining sector, possibly due to delays in offshore shipments. Weakness remains notable in the retail sector at a time of soft consumer demand.

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GDP — Q4 | Incomes: GDP (I) 0.6%q/q, 1.9%Y/Y

The real GDP income estimate lifted by 0.6% in the December quarter, matching the production estimate (0.6%) and above the expenditure estimate (0.4%), while annual growth edged up from 1.7% to 1.9%.  

In nominal terms, Australian GDP growth fell by 0.3% in Q4, which resulted in growth over the year decelerating from 5.6% to 4.1%. In the December quarter, national income was hit as key commodity prices rolled over from elevated levels.

This was evident through a 5.3% correction in the nation's terms of trade, which was its steepest quarterly decline since mid 2017, as annual growth was cut from 7.7% to -0.6%.   

  

Private sector company profits (excluding financial corporations) fell by 2.3% in Q4 unwinding their increase from the previous quarter, while annual growth stepped down from 13.6% to 6.3%. This decline was concentrated in the mining sector due to the weakness in commodity prices. Profits by financial corporations posted their softest quarterly increase in 2 years with a 0.4% rise in Q4 and this resulted in annual growth moderating from 5.2% to 3.9% to its slowest pace in 6 years.    

Based on the compensation of employees measure, wages and salaries were a touch softer in Q4 with a 1.0% rise — its slowest in a year — though annual growth still edged up from 4.9% to 5.0%. Despite a recent slowing, employment growth has driven the nation's wages bill on an upward trend over the past couple of years. 

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GDP — Q4 | Production: GDP (P) 0.6%q/q, 2.4%Y/Y

The Q4 production estimate for GDP was 0.6%, coming through in line with the income estimate and above the expenditure outcome, with growth over the year moving up from 2.0% to 2.4%.  

Output continues to be led by the healthcare sector, which expanded by 1.7% in Q4 to 8.3% over the year. The sector has been supported by robust growth in public spending associated with the rollout of the NDIS and aged care services. Mining sector output advanced a little further in Q4 (1.6%), firming annual growth from 7.1% to 7.3%. 

Weighing on output in Q4 were construction (-2.3%), administration and support (-0.9%), arts and recreation (-0.4%) and wholesale trade (-0.1%). Over the past year, agriculture (-2.8%) in response to drought conditions and construction (-3.6%) following the downturn in the residential cycle have weighed notably on the domestic economy. The sector-by-sector breakdown is shown in the chart, below.   

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GDP — Q4 | Prices

The broadest measure of economy-wide inflation — the GDP deflator — contracted by 0.8% in Q4, its first quarterly fall since Q2 2017, reflecting the sharp decline in the terms of trade (-5.3% in Q4), as annual growth declined from 3.6% to 1.9% to its weakest pace in nearly 2 years. The Gross National Expenditure deflator adjusts for changes in the terms of trade and prices on that basis held steady at 0.6% in Q4, with annual growth edging higher from 1.8% to 2.0% to its fastest pace in a year.     

The Consumer Price Index (CPI) on a headline basis lifted by 0.7% in the December quarter, with annual growth firming from 1.7% to 1.8%. The closest proxy in the National Accounts is the household consumption deflator, though it differs in that it is based on dynamic changes in consumer spending rather than the 'fixed basket' methodology in the CPI, with this gauge showing a softening in the quarterly increase from 0.5% to 0.3% and in the annual pace from 1.9% to 1.8%.     

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GDP — Q4 | Productivity

In the December quarter, growth in total hours worked advanced by 0.3% and as this was slower than the rate of output growth (0.5%), GDP per hour worked increased slightly by 0.1%. On an annual basis, hours worked expanded by 1.8% compared to output growth of 2.2%, resulting in a rise of 0.4% in GDP per hour worked. Weak productivity continues to be a structural headwind for wages growth. 

In the market sector (excluding the public sector), hours worked lifted by 0.3% in Q4 and by 1.5% over the year. GDP per hour worked remained broadly flat at 0.1%q/q and 0.2%Y/Y. Real GDP growth per capita saw another modest rise of 0.2% in Q4, with annual growth still subdued despite firming from 0.3% to 0.7%.     

With productivity remaining weak, nominal non-farm unit labour costs lifted by a further 0.6% in Q4 to be up by 2.7% over the year. Adjusting for inflation, real non-farm unit labour costs showed a 1.4% lift in the quarter, with annual growth rising from -0.5% to a still subdued 0.9% in line with elevated spare capacity in the labour market.   

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GDP — Q4 | States

State demand growth was led by New South Wales at 0.5% in Q4, with the annual pace rising from 0.6% to 1.6%, though this is down from 3.6% a little more than a year ago. That broader deceleration remains driven by slow growth in household consumption, which lifted by 0.2% in Q4 to 0.9% over the year, with its most recent high in annual terms coming in Q2 2018 at 3.2%. The rollover in residential construction continues to weigh on the state with total activity falling by a further 2.3% in the quarter and by 16.1% through the year. Meanwhile, business investment has slowed to a 1.7% pace in annual terms from its most recent peak of 13.2% as of Q3 2016. 

Coming after recent strength, state demand in Victoria contracted by 0.1% in Q4, lowering annual growth from 2.1% to 1.3% — its weakest pace in more than 6 years. Household consumption growth is subdued at 0.5%q/q and 1.6%Y/Y. Residential construction is also in a downturn (-1.8%Y/Y), though it is not nearly as severe as implied by the national result (-9.7%Y/Y). The main drag on activity in Victoria over the past year has been a rollover in business investment, which contracted by 3.7%Y/Y to Q4 from a 12.1% expansion through the year to Q4 2018. Public demand has also pulled back led by a slowdown in infrastructure work.    

In the remaining states, demand was broadly weak in the December quarter. Highlighting that point, the strongest result that came through was from Queensland, which posted a 0.2% rise in Q4, though annual growth in that state eased from 1.7% to 1.2%. Here, household consumption growth rebounded by 0.7% in Q4 after falling by 0.1% in Q4, albeit with annual growth holding at a subdued 1.6%. Continuing to weigh on the state are weakness in residential construction and business investment. In South Australia, demand fell by 0.2% in Q4 and was flat over the year, reflecting slow growth in household consumption and weakness in residential construction. 

Demand in Western Australia declined by 0.2% in Q4, though annual growth lifted from 1.1% to 1.7%, which is the strongest pace of all the states. Household consumption growth remained in a gradual uptrend rising by 1.4% through the year. The residential construction cycle remains weak, though the outlook for business investment is constructive following several years of decline and will be driven by the mining sector. In Tasmania, demand contracted by a sharp 1.0% in the quarter as annual growth decelerated from 4.0% to 1.6%. The weak outturn in Q4 was driven by a pullback in commercial building and residential alterations and a slowdown in public demand.