In review: Australian GDP growth slows below trend in Q4

Growth in the Australian economy was softer than expected in the December quarter (Q4) marking a notable loss in momentum over the second half of 2018. Household consumption continued to slow, residential construction activity turned down and business investment was soft. Tight credit conditions and the headwinds from slowing global economic conditions were also key influences.

Real GDP growth in seasonally-adjusted terms was +0.2% in Q4 and was below the market median forecast for a soft +0.3%. GDP growth on an annual basis slowed from a downwardly revised pace of +2.7% in Q3 to +2.3% and printed below the market forecast for +2.5%. Growth in the domestic economy can, therefore, be described as having slowed to a below-trend pace. Trend growth is estimated at around 2.75% and is regarded as the pace of growth required to maintain stability in unemployment and inflation. 

In its February Statement on Monetary Policy, the Reserve Bank of Australia (RBA) had forecast annual GDP growth in Q4 at +2.75%, +3.0% in 2019 and +2.75% in 2020. Though still upbeat, these forecasts were initially stronger until Q3's soft GDP growth outturn led to a downgraded assessment. A similar scenario appears to be forthcoming, though the main difference this time would be that slower growth would likely have implications for its unemployment rate forecasts, which were previously expected to tighten to 4.75% by end-2020. The labour market has been a key support for the domestic economy, however; a softer outlook would bring the prospect of rate cuts into firmly into focus. Financial markets have brought forward expectations for easing and now expect the RBA to cut the cash rate by 0.25% by Q4 this year. 

— — —

GDP — Q4 | Expenditure: GDP (E) +0.3%q/q, +3.1%Y/Y

Household consumption (+0.4%q/q, +2.0%Y/Y) — Household spending clearly slowed over the second half of 2018. On an annualised basis, household consumption was tracking at around 2.5% through the first half but slowed to around 1.5% for the second half. Growth in Q4 was soft at 0.4% and followed a similar outcome in the previous quarter (+0.3%). Over the year, consumption growth softened to 2.0% — its slowest in 5½ years — from 2.6% as of Q3.  

The details in Q4 across the retail categories continued the softness that was evident in the previous quarter. The strongest gains in percentage terms were in clothing and footwear (+2.2%) and cafes and restaurants (+0.9%). Outside of retail, new vehicle purchases fell by sharply (-1.5%) and operation of vehicles (including fuel) lifted modestly (+0.4%). Growth in spending on household services (including areas such as health and education) was slightly stronger than retail in the quarter but fairly modest. 

In terms of income, growth in real household disposable income lifted by 0.6% in Q4 after declining slightly in the previous two quarters. Annual growth, though, slowed from 0.9% to just 0.4%. Weak income growth has been a persistent headwind to households in recent years and as a result, saving has been in steady decline. However, the saving ratio ticked up slightly in Q4 by 0.2ppt to a still very low level at 2.5%. A lift in household saving over the coming quarters is certainly a possibility given the risks to sentiment from declining property prices and overall household wealth, and this would weigh on the outlook for consumption growth.    

Dwelling Investment (-3.4%q/q, +2.5%Y/Y) — Residential construction activity turned down sharply over the second half of the year after a robust start to 2018. New construction fell by 3.6% in Q4 and alterations declined by 3.1%. Total activity was down by 3.4% in the quarter and by around 3.0% on an annualised basis over the half. This compares to activity increasing at an annualised pace of around 5.5% through the first 6 months of the year. The rapid deterioration in building approvals, falling property prices and tight credit conditions are impacting activity notably. Residential construction can be expected to remain a headwind to growth throughout 2019.   

  

Business Investment (+0.7%q/q, -0.2%Y/Y) — New business investment lifted by 0.7% in the quarter after declines of 1.3% in Q3 and 0.4% in Q2. The improvement was broad based across machinery and equipment (+0.2%q/q), engineering (infrastructure assets) (+1.0%q/q), building (+0.1%q/q) and intellectual property products (+1.8%q/q). Late-cycle weakness associated with the completion of major resources projects continued to weigh, though investment from the non-mining sectors lifted. Looking ahead, the drag from unwinding mining sector investment is projected to end this year and with expectations for non-mining investment on the rise, business investment is likely to be a growth driver over the next couple of years.  

Public Demand (+1.6%q/q, +6.1%Y/Y) — Overall growth in Q4 and in 2018 was led by public sector demand. The detail for the quarter was mixed with consumption spending increasing by 1.8% but underlying investment softening by 0.4%. That softness for the latter should prove temporary given the elevated level of long-term infrastructure-related work in the pipeline.  

Net Exports (-0.1ppt in Q3, +0.8ppt Y/Y) — Net exports were a modest drag on activity in Q4 with import volumes rising slightly (+0.1%) and exports soft (-0.7%). However, trade added notably to activity in 2018 and is expected to remain supportive this year led by the resources sector. Inventories contributed +0.2ppt to growth in the quarter.  

— — —

GDP — Q4 | Incomes: GDP (I) +0.1%q/q, +1.7%Y/Y

Q4's estimate for real GDP income lifted by 0.1%, matching the result from Q3, and was softer than the expenditure (+0.3%) and production (+0.2%) outcomes. Annual growth eased from 2.4% to 1.7%, its lowest since the March quarter of 2010, albeit impacted by a sizeable base effect. 

Nominal GDP growth was solid again in Q4 at 1.2%, which lifted the annual pace from 5.1% to 5.5%. This compares with annual growth of 3.7% in Q4 2017. Rising commodity prices were a lasting theme in 2018 and has driven a strong increase in national income. The nation's terms of trade lifted by 3.2% in the quarter to be 6.1% higher over the year.

In line with those favourable conditions, private sector company profits ex-financial corporations lifted by 3.8% in Q4 to accelerate annual growth from 6.4% to 10.9%, which looks to be driven predominantly by the mining sector. In the financial sector, gross profits increased by 1.4% in the quarter and by a solid 6.8% through the year. 

The compensation of employees (CoE) through wages and salaries measure posted a 0.9% increase in Q4, though the annual pace turned down to 4.3% from 4.6% and looks to have peaked in the first quarter of the year at around 5.2%. The CoE measure is impacted by hours worked, which the Bureau reported lifted by 0.4% in Q4 and by 1.5% annually after slowing over the second half of 2018.  

— — —

GDP — Q4 | Production: GDP (P) +0.2%q/q, +2.2%Y/Y

The outcome for the production estimate for GDP at 0.2% in the quarter was in the middle of the expenditure and income estimates. Annual growth eased from 2.4% to 2.2%, its slowest pace since mid-2015. 

In Q4, there were declines in output recorded by agriculture, construction, manufacturing and utilities. Drought conditions continue to impact the agriculture sector with output deteriorating notably over the year. 

The healthcare industry remained in first place, with the sector benefitting from strong public spending and also by households, with related employment remaining robust. The chart, below, provides the full breakdown.    

— — —

GDP — Q4 | Prices

Economy-wide inflation according to the GDP deflator posted a strong rise of 1.1% in the quarter, while the annual pace accelerated from 2.2% to 3.1%. These moves reflect the strong increase in the terms of trade in Q4. The Gross National Expenditure deflator, which is not impacted by the terms of trade, showed a subdued rise of 0.3% in the quarter and the annual pace was steady at 1.6%.  

The household consumption deflator is a proxy to the more commonly known Consumer Price Index (CPI) but differs in that it reflects dynamic changes in consumer spending, that is the tendency towards lower-priced goods over time. In Q4, the household consumption deflator increased by 0.3% and by 1.6% for the year. Both of these outcomes were a moderation from Q3 at 0.5%q/q and 1.8%Y/Y. For comparison, the CPI lifted by 0.5% in the December quarter with annual growth at 1.8%. 

— — —

GDP — Q4 | Productivity

Low productivity growth has been a persistent theme in the domestic economy in recent years and that was again evident in Q4. For the third consecutive quarter, growth in total hours worked (+0.4% in Q4) exceeded the pace of output growth (+0.2%). As a result, real GDP per hour worked declined by 0.2%. Unusually, the annual pace lifted from 0.6% to 0.8%, though that reflected a base effect from Q4 last year. GDP per hour worked for the market sector (excluding the public sector) also fell by 0.2% in the quarter with annual growth very subdued at 0.7%.       

Turning to the costs front, nominal non-farm unit labour costs increased by 0.8% in the quarter and by 1.3% over the year. This compared with growth of 1.3% in Q3 and 1.1% in annual terms. Though still increasing, growth in nominal non-farm unit labour costs has been slowing ever since peaking at a pace of 2.4%Y/Y in Q4 2017. Removing the impact of inflation, real non-farm labour costs declined by 0.1% in the quarter after rising by that amount in Q3. On an annual basis, real non-farm labour costs fell by 2.1% and deteriorated from -1.3% in Q3, though that includes a sizeable base effect. Declining labour costs in real terms highlights the nation's soft inflationary pulse and indicates that wages growth is still being restrained by elevated levels of excess capacity in the labour market.

  

— — —

GDP — Q4 | States

It was a disappointing 4th quarter for New South Wales with demand contracting by 0.1%, though the first three quarters of 2018 were robust. This outcome was driven by soft growth in household consumption and weakness in residential construction activity. These factors pose a headwind to the state's economy in 2019. Details for business investment were mixed in Q4 with non-residential construction lifting but equipment investment was softer. Public demand through infrastructure investment remains strong. 

In Victoria, demand lifted by 0.6% in Q4, though conditions moderated over the second half of the year. Growth in household consumption at 0.6% was much stronger than in New South Wales and nationally. Despite a soft result in Q4, the state continues to be supported by public sector investment in infrastructure in response to strong population growth. Business investment lifted modestly in Q4 but was strong overall in 2018. A source of weakness likely to be forthcoming is slowing residential construction activity matching with deteriorating building approvals data. 

Looking at the remaining states, demand lifted solidly in Queensland by 0.9% after a weak Q3. Public demand and household consumption were the driving factors, though were moderated by weaker business investment. Demand lifted by 0.8% in South Australia, mainly due to a strong rise in public spending and investment. In Western Australia, demand contracted by 0.3% in what was a soft finish to a weak 2018. Declining business investment, notably in the mining sector, was the major factor, though residential construction also contributed. It was a solid Q4 in Tasmania, with demand increasing by 0.6% while 2018, on the whole, was robust. This was in response to broad-based support from households, business investment and public demand.    

Australia posts a near-record trade surplus in January

In positive news for the domestic economy, Australia posted its second-highest monthly trade surplus on record in January. Net exports were a modest drag on GDP growth in yesterday's Q4 National Accounts but are expected to be supportive in 2019 driven by the resources sector.

International Trade — January | By the numbers

• The trade surplus increased by $780m in January to $A4.549bn, far eclipsing the market forecast for a $3.0bn surplus. December's surplus was revised up to $3.769bn from $3.681bn. 
• Export earnings surged by $1.9bn, or by +5.0%, in January to $A39.937bn, with annual growth at 15.9% (prior rev: -1.1%m/m, +16.3%Y/Y) 
• The import bill rebounded by $1.12bn, or by +3.3%, in the month to $35.388bn, driving annual growth to 6.3% (prior rev: -5.5%m/m, -0.5%Y/Y)

International Trade — January | The details 

The surge in export earnings of $1.9bn was driven by the volatile non-monetary gold category, which increased by $1.37bn. There were modest increases for rural goods (+$97m), non-rural goods (+$396m) and services ($46m). 

Commodities exports are included under 'non-rural goods', with the ABS reporting a lift for coal (+$351m), iron ore (+$279m) and 'other mineral fuels' (LNG, +$51m). Those increases look to be the result of a surge in prices for iron ore and more modest increases for coal and LNG. 

Imports plummeted in December but bounced back in January. The total value of goods and services imported increased by $1.12bn. The main contributions came from capital goods (+$737m) and consumption goods (+$483m), though these categories drove the sharp decline in December (consumption goods -$980m and capital goods -$627m). Elsewhere, intermediate goods lifted by $157m, though services declined by $191m.  

International Trade — January | Insights

A strong start to the quarter from trade after a disappointing outcome in Q4. Export volumes were down slightly in Q4, reportedly impacted by supply disruptions in the resources sector, and are expected to improve in Q1 and over 2019 as a whole. Though real GDP was soft yesterday, the nominal side of the economy increased strongly and is benefitting from a boost to national income through rising commodity prices and an associated lift in the terms of trade.       

Soft start to 2019 for Australian retailers

Australian retail sales growth was much softer than expected in January according to data released by the ABS today. This follows yesterday's Q4 National Accounts that highlighted weaker dynamics around the household sector. 

Retail Sales — January | By the numbers

• Retail turnover lifted by 0.1%, or by $29.3m, in January to $A27.012bn. The market forecast was for a +0.3% outcome. Turnover declined by 0.4% in December. 

• Annual turnover growth eased from 2.8% to 2.7% on seasonally adjusted figures, however; in trend terms, sales growth again slowed at a faster pace down from 3.1% to 2.8%. 

Retail Sales — January | The details 

As would be expected, the soft headline outcome was reflected in the underlying detail. In nominal terms, turnover lifted by $29.3m in January, however spending on food was the main factor rising by $33.9m. Removing the impact of food sales, turnover declined by $4.6m. 

The full detail across the categories for January was; food +$33.9m (+0.3%), household goods -$2.1m (0.0%), clothing and footwear -$6.2m (-0.3%), department stores -$32.8m (-2.1%), 'other' (includes items such as pharmaceuticals and cosmetics) +$26.4m (+0.7%), cafes and restaurants +$10.0m (+0.3%).

The state-based outcomes were soft in January, except for a 0.7% rise in New South Wales — the state accounts for a little above 30% of nominal retail spending nationally. If New South Wales' contribution was removed, retail spending would have fallen by 0.1% in the month.  

Though a decent outcome for New South Wales in isolation, retail activity has been weakening in recent months highlighted by a 0.5% fall in spending in Q4. That is with the background of falling property prices combined with persistently weak income growth.

For the other states, Victoria lifted by 0.1%, though conditions look to have cooled over recent months after robust spending growth over the first 3 quarters of last year, Queensland -0.5%, South Australia +0.1%, Western Australia -0.3% and Tasmania +0.4%.  

The Bureau also reported that it estimated online spending to have declined sharply in January by around 23% to $1.487bn. These estimates are in original terms so are not seasonally adjusted, though it has reported similar declines for January over the 5 years it has been producing these figures. As a percentage of total retail spending, the online space remained at 5.6%.   

Retail Sales — January | Insights

This was a soft update and is consistent with the detail on consumer spending, particularly on discretionary areas, from yesterday's National Accounts for Q4. Households have had to settle for weak income growth over recent years, though strong employment growth been supportive. However, with saving falling to a very low level there are signs that would appear to be consistent with the thesis that declining property prices are impacting on consumption.  

Australian Q4 GDP growth +0.2%; households under pressure

Growth in the Australian economy slower at a sharper-than-forecast pace in the December quarter, with activity deteriorating notably over the second half of 2018. Real GDP growth on a seasonally-adjusted basis in Q4 was +0.2%, which was below an already soft market median forecast of +0.3%. The domestic economy can now be described as growing at a well below-trend pace after slowing from +2.7% in annual terms (revised down from +2.8%) to just +2.3% in today's release and also missed the market forecast for +2.5%. Trend or potential growth in Australia is around 2.75%Y/Y and is the pace of growth consistent with maintaining stable unemployment and inflation.

The Reserve Bank of Australia lowered its forecast for GDP growth to 2.75% over the year to Q4 from +3.25% in February's Statement on Monetary Policy. This implied an expectation for a +0.6% outturn in the quarter, meaning that the slowdown was much sharper than anticipated according to its forecasts. This places pressure on the Bank's forecast for above-trend in 2019 (+3.0%) and trend in 2020 (2.75%) and will, therefore, lead to a firming in market expectations for rate cuts in 2019. Markets were already priced for a cut by early 2020.   

The loss of momentum in the domestic economy over the second half and in Q4 was broadly based, coinciding with tight credit conditions and the headwind from slower global growth. The key focus for these National Accounts is around the household sector. Growth in household consumption on goods and services was +0.4% in Q4 and followed a soft Q3 at +0.3%. Importantly, annual growth slowed from +2.6% to +2.0% and highlights a slowing trend. There has been considerable discussion from the RBA around volatility in recent quarterly outcomes clouding understanding of the underlying trend. Real growth in disposable income was +0.6% in Q4, a stronger result than in the previous 2 quarters (-0.1% in Q2 and -0.2% in Q3), though annual growth continues to slow and is now just +0.4% from +0.9%. The household saving ratio lifted by 0.2ppt to a still very low 2.5% and can be subject to large revisions. However, an uptrend over the coming quarters would be consistent with the idea that households are cutting back on consumption after persistently weak income growth over recent years as property prices declines show no clear sign of easing. 

Activity in residential construction turned around completely over the second half of 2018. Output fell by 3.4% in Q4 with new construction -3.6% and alterations -3.1%. This followed a broadly flat (+0.5%) Q3. In the first half of the year, activity in the sector expanded at an annualised pace a little below 6%, compared to a decline of around 3% annualised in the second half. This reflects a deterioration in building approvals, tight credit conditions and falling prices.

Business investment lifted modestly in Q4 driven by non-dwelling construction and equipment spending. With major resources projects now completed, the outlook for business investment is positive and should support growth over the next couple of years according to the intentions component in the recent Capital Expenditure data.

Public demand continues to support the domestic economy and led growth in the quarter and over the year. This is expected to continue for a while yet due to an elevated level of infrastructure-related projects in the pipeline, particularly in New South Wales and Victoria.   

Inventories were an upside surprise in today's release adding around 0.2ppt to growth in Q4. The Business Indicators data from earlier this weak had pointed to a flat to slightly negative contribution to activity in the quarter. 

Net exports subtracted around 0.1ppt from the quarterly growth figure that reflected weakness in export volumes, reportedly due to supply disruptions experienced in the resources sectors. Import volumes lifted slightly over the quarter.

One other aspect out of today's release that has gained widespread attention is that real GDP growth in per-capita terms declined for the second consecutive quarter in Q4 (-0.2% and -0.1% in Q3). Essentially, that means that population growth has effectively been driving economic growth over the second half of 2018 and highlights weakness in productivity.  

More in-depth analysis to follow in our full review (link here). 

What to expect: GDP Q4

The ABS will release the National Accounts for the December quarter today at 11:30am AEDT. The National Accounts provide the most comprehensive set of statistics on the Australian economy, including the GDP growth figures.

Momentum in the Australian economy continued to slow over the December quarter coming after activity was softer than expected in Q3. This looks to be broadly based, with the household sector constrained by weak income growth and concerns around a wealth effect from falling property prices, and weakness in the more cyclical areas of the economy in residential construction and business investment with the overlay of tight credit conditions.  

As it stands | GDP

Growth in the domestic economy was +0.3% in the September quarter, a sizeable disappointment on the +0.6% outcome that was forecast. Annual growth slowed to an around-trend pace of 2.8% from 3.1%. The slowdown largely reflected lower growth in household consumption, with notable weakness in the discretionary areas of spending.

In a development that would become increasingly clear over the ensuing months, residential construction showed early signs of weakness after a robust period of activity through the first half of 2018. Meanwhile, business investment continued to weigh on growth reflecting late-cycle weakness associated with the completion of major resources projects. 

Public demand continued to bolster growth supported by consumption spending and an elevated level of investment in infrastructure-related projects. Trade also supported growth in Q4, though the underlying detail was weak. 

  

Market expectations | GDP

Today, the median forecast according to Bloomberg looks for growth in the quarter of 0.3%. As of last Friday, the median expectation was for growth of +0.5%, however soft partials from Business Indicators and net exports released earlier this week have resulted in a downgrade. Assuming no revisions to previous quarters, annual growth is expected to slow to 2.5% from 2.8%. 

Slower growth is anticipated by the Reserve Bank of Australia (RBA). The Bank lowered its growth forecast for Q4 from 3.25%Y/Y to 2.75%Y/Y in February's Statement on Monetary Policy. However, even after allowing for that downgrade, growth in Q4 would need to print at +0.6% — twice the market expectation — for its forecast to be achieved.

What to look for | GDP

The key aspect of these National Accounts is around the household sector, in particular consumption and income growth. Consumption growth has been quite volatile from quarter to quarter over recent times, though has remained relatively resilient in annual terms despite the persistent headwind from weak income growth over the past few years. As a direct consequence, the household saving ratio has been in a steady decline to around pre-financial crisis levels.

In that situation, the downturn in national property prices that has extended for more than 12 months has been a significant development and has highlighted the potential vulnerability of the household sector to a wealth effect. A lift in the saving ratio would be consistent with signs that households are reducing consumption in response to the deterioration in their wealth through declining property prices.

The RBA continues to highlight its view that household income growth is more pertinent to consumption growth than wealth effects. Growth in wages according to the Wage Price Index has been lifting very gradually over recent quarters so it will be critical to see if this is flowing through to household incomes.  

RBA on hold; remaining upbeat

The Reserve Bank of Australia (RBA) kept its cash rate on hold at 1.5% today for the 28th consecutive meeting. Despite tomorrow's National Accounts likely to show a slowing in growth in the domestic economy over the December quarter, the Governor's statement (see here) was fairly upbeat. 

By way of comparison, there was little change to the wording in this statement from the previous month. Conditions in the global economy were acknowledged as having continued to soften through the early part of the year. In particular, trade tensions remains a key factor contributing to uncertainty. Meanwhile, financial conditions had eased referencing lower long-term yields, improvements in equity markets and a moderation in the cost of short-term bank funding in Australia. 

The Bank remains notably upbeat on the labour market, highlighting that "there has been a significant increase in employment and the unemployment rate is at 5%". Other assessments around an expected further decline in the unemployment rate and a gradual lift in wages were unchanged.

Ahead of tomorrow's Q4 National Accounts, the Governor noted that "other indicators suggest growth in the Australian economy slowed over the second half of 2018". However, it then went on to reiterate the upbeat outlook of the Bank, namely a forecast for above-trend growth in 2019 driven by business investment, public demand, and strong employment. The main risk to that assessment, at least domestically, is from some form of a wealth effect from the impact of falling property prices on household consumption growth. This and household income are the key points to focus on in the Q4 National Accounts.

On the housing market, the statement noted that "the adjustment in the Sydney and Melbourne housing markets is continuing" and that "conditions remained soft in both markets". Tighter credit conditions and a "further" easing in the demand for credit by owner-occupiers were highlighted.

The Bank reiterated its expectation for underlying inflation to pick-up to 2% by year-end and then to 2.25% in 2020. The wording of the final paragraph was unchanged. 

Tomorrow, RBA Governor Philip Lowe is scheduled to deliver a speech titled "The Housing Market and the Economy" at 9:10am AEDT at Australian Financial Review's 2019 Business Summit in Sydney. This could provide more nuanced insights than is typically conveyed in these monthly statements.  

Mixed detail from net exports and public demand

The detail from the last of the partial indicators for Q4's Australian GDP growth figures was released by the ABS this morning. As expected, net exports will take away from growth in the quarter, while public demand will contribute. 

Balance of Payments, Government Finance  — Q4 | By the numbers

• Australia's current account deficit narrowed sharply by $3.582bn in Q4 to -$A7.203bn. The market had forecast a contraction to -$9.2bn (prior rev: -$10.785bn from -$10.688bn)

• The trade surplus increased by $2.661bn to $A8.452bn for Q4 (prior rev: $5.764bn from $6.607bn)

• Net Exports are expected to subtract 0.2ppt from GDP growth in Q4, slightly larger than the -0.1ppt drag that had been anticipated (prior: +0.3ppt)

• The separate Government Finance data showed growth in underlying public demand lifted by 1.6% in Q4 (prior +2.4%). The ABS reported that this was expected to add 0.3ppt to GDP growth in the quarter.

Balance of Payments, Government Finance — Q4 | The details 

Looking at the Balance of Payments, the current account deficit narrowed from -$10.785bn to -$7.203bn over Q4. This was driven by the trade balance (balance of goods and services) increasing by $2.661bn to $8.452bn. Earnings from goods and services exported lifted by 3.3% to $11.462bn, which followed strong price rises for key commodities; LNG (+6%), iron ore (+9%) and coal (+4%). Accordingly, the terms of trade look to have risen by around 3% over the December quarter. The income deficit improved by 5.2% (or by $848m) in Q4 to -$15.318bn.

From a volume perspective, which removes the impact of price changes, exports declined by 0.7%q/q and imports increased slightly by 0.1%q/q. With import volumes higher than export volumes in Q4, net exports will subtract 0.2ppt from GDP growth according to the ABS. 

For Government Finance, growth in underlying public demand was 1.6% in Q4 to $112.322bn to be 6.1% higher over the year. Within this, government consumption expenditure increased by 1.8%q/q (+5.6%Y/Y) and investment ex-transfers lifted by around 0.8%q/q (+8.1%Y/Y). Public demand will add around 0.3ppt to Q4 GDP growth.     

Balance of Payments, Government Finance — Q4 | Insights 

The detail from these releases was mixed, with net trade set to weigh more heavily on growth than had been expected, though on the other hand public demand appears to have come in above expectations. Late last week, the median market expectation for GDP growth in Q4 was +0.5% (+2.7%Y/Y) according to Bloomberg. Since then, most forecasters have lowered their expectations for the quarter to around 0.2% to 0.4%. The Q4 National Accounts are scheduled to be released at 11:30am AEDT tomorrow. 

Australian building approvals lift by 2.5% in January

Australian building approvals lifted at a faster-than-forecast pace in January posting their first monthly rise since September last year. The headline result was driven by increases in approvals for detached houses and units. Overall, however, total approvals remain sharply lower compared to a year earlier after deteriorating rapidly over the second half of 2018.

Building Approvals — January | By the numbers

• Total dwelling approvals (across the private and public sectors) increased by 2.5% in January to 14,395 on a seasonally-adjusted basis to outpace the market forecast for +1.0%. Last month's initially reported fall of -8.4% was trimmed to -8.1% after revision.

• On a 12-month basis to January, total approvals fell by 28.6% (prior rev: -22.0% from the initial estimate of -22.5%)

• House approvals increased by 1.9% in the month  (prior -1.7%m/m) to 9,504 to be down by 7.0% over the year (prior -10.4%)

• Unit approvals were up by 3.8% in January (prior -18.7%) to 4,891, though are -50.9% on a year earlier (prior -37.8%)

Building Approvals — January | The details

The detail in January was the most positive it has been in several months with increases across the 'total', house and unit categories. The last time that happened was in June last year. However, as the chart, above, shows, approvals are in a sharp downtrend with little indication as yet of an easing in the pace of decline. 

Approvals to build detached houses lifted by 1.9% in January, which was its strongest outturn since June 2018. However, house approvals in annual terms (-7.0%Y/Y) have now been in decline for 7 consecutive months. 

Unit approvals posted a 3.8% rise in the month — their first gain since September — with the available detail indicating that an uptick in low-rise units was able to soften another steep fall from the high-rise segment. Overall, the level of unit approvals has halved (-50.9%Y/Y) from a year earlier; an extraordinary fall considering that annual growth was positive (+2.7%) at the turn of the financial year. 

The chart, below, highlights how approvals deteriorated over the second half of last year. While units were the main driver, there was also weakness from houses.  

The state detail for January and on a 12-month basis is summarised in the table and chart, below. The annual changes highlight the broad-based nature of the weakness, particularly for units but also for houses. The one exception is Tasmania, where approvals appear to have been on an uptrend over the second half of last year in contrast to the rest of the nation.   

Lastly, the value of alteration work approved in January fell by 2.2% to $697.3m (-2.5%Y/Y). Meanwhile, non-residential work approved increased by 6.4% to $3.614bn (+10.3%Y/Y).  

Building Approvals — January | Insights 

January approvals figures can often display heightened volatility due to seasonality, though in this case, the 2.5% increase looks to be fairly modest and the detail was more positive than in recent months. However, the magnitude of the deterioration over the second half of 2018 remains the prevailing theme for the outlook. In the near term, the level of residential construction activity is supported by an elevated pipeline but with approvals falling away rapidly the indications continue to point to a sharp slowing ahead over 2019 and possibly into 2020. Last week's construction work done data highlighted that activity started to deteriorate in Q3 before accelerating in Q4. Factors likely weighing on the fall in building approvals include tighter financing conditions, declining property prices and an increased supply of stock with more to come online as the pipeline is worked through. 

Australian Business Indicators soft in Q4

The Business Indicators data released by the ABS this morning was on the soft side of expectations ahead of Wednesday's GDP growth figures for the December quarter. Company profits were driven by the surging mining sector, as wages and salaries increased modestly in the quarter. Inventories could be flat to a slight drag on growth in Q4.

Business Indicators — Q4 | By the numbers 

• Inventories declined by -0.2% in Q4 to $161.23bn, with the market looking for a rise of 0.3% (prior rev -0.1% from 0.0%)

• Company gross operating profits increased by 0.8% in Q4 to $90.06bn, while the annual pace of growth slowed to +10.5% from +12.3%.

• Wages and salaries lifted by 0.8% in Q4 to $139.66bn, with annual growth easing from +4.3% to +4.1%.

Business Indicators — Q4 | The details

Starting with inventories, the overall level held by firms eased by 0.2% over the December quarter and follows a downwardly revised decline (-0.1%) from Q3. Across the year, growth in inventories slowed to a modest +1.0% from the +1.5% pace in the previous quarter. Firms will typically look to build inventories in response to rising domestic demand. The detail in Q4 was; mining -2.8%, manufacturing -0.8%, utilities -0.5%, wholesale trade +0.4%, retail trade +0.4% and accommodation and food services +6.9%.  

Gross company profits were up by a modest 0.8% over the quarter and by 10.5% over the year to $90.06bn. These outcomes were a step down from the previous quarter at +1.2%q/q and +12.3%Y/Y. This component flows through to the estimate for non-financial corporate profits in the National Accounts.

Profitability continues to rise strongly in the mining sector due to surging commodity prices. Mining sector profits lifted by another 4% in the quarter to be up by 26.3% from a year earlier. Wednesday's National Accounts should confirm a solid rise in the terms of trade in Q4. 

Looking at the non-mining sectors in aggregate, profitability in Q4 looked to be soft at -1%q/q (+2.5%Y/Y). Within this, there were increases for; utilities (+3.7%), construction (+1.6%), accommodation and food services (+10%), transport (+8.2%), professional services (+6.7%) and 'other' services (+2.5%). This was offset by declines for; manufacturing (-3.6%), wholesale trade (-3.4%), retail trade (-0.8%), media and telecommunications (-7.8%), financial and insurance services (-26.6%), real estate services (-1.3%), administration (-13.8%) and arts and recreation (-5.1%).     

The wages and salaries component is the primary estimate for the key Compensation of Employees number in the National Accounts. Wages and salaries lifted by 0.8% in the quarter to $139.66bn (+4.1%Y/Y). This figure reflects growth in hours worked and wages. Available data from the ABS had indicated that hours worked lifted only modestly over 2018, while wages continued a very gradual uptrend.  

Business Indicators — Q4 | Insights

Today's inputs are another soft lead towards Wednesday's Q4 GDP growth figures. Inventories could be flat to slightly negative. The income components from company profits and wages and salaries were also softer than anticipated. The partial indicators already released from retail sales, construction work done and capital expenditure have been consistent with soft activity over Q4. The final inputs will be released tomorrow for net exports and government spending.