In review: Australian Q3 GDP growth 1.7%; households languishing

Momentum in the Australian economy remains subdued, with real GDP growth on a seasonally adjusted basis rising by 0.4% in the September quarter to disappoint the consensus expectation for a 0.5% increase. Annual growth moved a touch higher from an upwardly revised pace of 1.6% to 1.7% but remains well below the nation's trend rate of growth of around 2.75%. 

In the September quarter, the headwinds from a weaker global economy persisted as a result of trade and geopolitical uncertainties and structural weaknesses associated with low productivity growth and aging demographics, while domestically household consumption growth slowed further, the downturn in the residential construction cycle intensified and the final phase of the unwind in the mining sector weighed on business investment. With the domestic economy operating well below capacity and inflation low, the Reserve Bank of Australia (RBA) followed up its rate cut late in Q2 with an additional 25 basis point reduction to the cash rate in July to a then-record low of 1.0%. Fiscal stimulus from the Federal government in the form of tax relief directed towards low-and middle-income earners also came online during the quarter. The combined impact generated a sizeable boost to household disposable income, however; 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 remains imbalanced between robust public demand, which lifted by a further 1.5% in Q3 to be up by 4.9% over the year in response to healthcare spending and infrastructure investment, and weakness in private sector demand that contracted by 0.2% in the quarter and by -0.4% through the year to be at its weakest pace since the GFC, weighed by slowing household spending and weakness in residential construction and business investment.     

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GDP — Q3 | Expenditure: GDP (E) 0.5%q/q, 1.7%Y/Y

Household consumption (0.1%q/q, 1.2%Y/Y) — Growth in household consumption was 0.1% in Q3 — its softest quarterly outcome since Q4 2008 — while the annual pace eased from 1.4% to 1.2% to be at it lowest in the post-GFC period.

The detailed breakdown showed spending continues to be led by non-discretionary areas of demand (0.4%q/q, 2.0%Y/Y), highlighted by strong quarterly rises from health (0.9%) and rents (0.6%). There was further weakness from the discretionary areas (-0.3%q/q, 0.0%Y/Y), driven by sizeable declines from vehicles (-1.0%) and hotels, cafes and restaurants (-0.9%) in Q3. 

Household disposable income growth was up by a sharp 2.5% in Q3 — its strongest quarterly rise since Q4 2010 — with annual growth accelerating from 2.7% to a 5-year high at 5.1%. In real terms, disposable income increased by 2.1% in the quarter and by 3.1% over the year. These strong outturns were the result of stimulus from two RBA rate cuts in June and July, which lowered total interest payments by 2.5% in Q3, and tax relief from the Federal government that was directed at low-and middle-income earners and resulted in a 6.8% fall in income tax payments in the quarter. At the same time, however, the household saving ratio surged by 2.1ppts to a 2½-year high at 4.8%. Thus, it is clear consumers used the windfall to bolster saving rather than lift spending, which is a likely response to subdued confidence and concerns over the economic outlook. 

Dwelling investment (-1.7%q/q, -9.6%Y/Y) — For the fourth consecutive quarter, residential construction activity declined, falling by 1.7% in Q3 as the annual contraction steepened from -7.8% to -9.6% to be in its deepest downturn in 7 years. New dwelling construction is weaker still after falling by a further 2.8% in Q3 to be down by 11.0% over the year, with activity contracting at its fastest pace in 18 years. Alterations lifted by 0.6% in the quarter, though the annual decline lifted from -4.1% to -7.1%. The intensification of the downturn in the residential construction cycle reflects an ongoing deterioration in dwelling approvals, which have fallen by around 20% over the past year.   

Business investment (-2.0%q/q, -1.7%Y/Y) — Weakness persists in business investment, which, on net, declined by 2.0% in Q3 to be down by 1.7% through the year reflecting headwinds from an uncertain global economic outlook and weak domestic demand conditions. The unwind in the mining sector associated with the completion of major LNG projects took its final leg lower with a 7.8% contraction in the quarter for an annual fall of 11.2%. Accordingly, engineering (infrastructure) investment was down by 5.9% in Q3 and 12.2% lower over the year. Based on the ABS's recent Capital Expenditure survey, investment plans for 2019/20 pointed to a 16% rise from the mining sector that would bring an end to 6 consecutive years of decline. Non-mining investment lifted modestly by 1.2% in Q3 and by 2.2% year-on-year around patchy detail. Non-dwelling construction is a point of strength (3.0%q/q, 4.2%) following an upswing in approvals, though equipment investment was down by a sharp 4.5% in the quarter to be 2.2% lower over the year. Meanwhile, intellectual property investment lifted by a further 1.7% in Q3 to a robust 7.1% annual pace, while cultivated biological resources posted a 0.9% rise in the quarter but remain weak over the year at -5.9% in response to drought conditions.

          

Public demand (1.5%q/q, 4.9%Y/Y) — Robust public demand continued in Q3 and remained the leading contributor to activity over the past year. Supported by public health initiatives, consumption spending lifted by a further 0.9% in the quarter to be up by 6.0% in annual terms. Meanwhile, after a recent period of softness, strength appeared to be returning to public investment with a 3.8% rise in Q3 with further support likely from an elevated pipeline of infrastructure projects to work through.

  

Net exports (0.2ppt in Q3, 1.1ppt yr) — Net exports made a more modest contribution to activity this quarter at 0.2ppt after a 0.6ppt boost in Q2. Over the year, net exports have been a key support for the economy during a time of weak domestic demand adding 1.1ppt to headline GDP growth. Export volumes were up by 0.7% in Q3 and 3.3% over the year, driven by a ramp-up in LNG production and strength in services associated with education and tourism, though rural exports have contracted sharply (-10.5%) due to the drought. Import volumes fell for the fifth straight quarter with a 0.2% fall in Q3 to be down by 1.5% over the year, which is broadly reflective of soft consumer and business spending and a lower Australian dollar.     

Inventories (0.1ppt in Q3, -0.3ppt yr) — Inventories added slighty to activity in Q3 following a sharp 0.4ppt contraction in Q2, however they have weighed over the year with the weakness centring on the retail sector consistent with weak consumer demand.  

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GDP — Q3 | Incomes: GDP (I) 0.4%q/q, 1.6%Y/Y

The real GDP income estimate posted a 0.4% rise in the September quarter, which was below the expenditure estimate but in line with the production estimate, while the annual pace ticked up from 1.5% to 1.6%. 

Australian GDP in nominal terms increased by 1.1% in Q3 that kept the annual pace steady at 5.5%. Its most recent trough came in Q4 2017 where annual growth was at 3.9%. Solid growth in each of the past 7 quarters has been driven by strength in commodities prices, though the impact was modest in Q3. The nation's terms of trade lifted by 0.4% in Q3 — its softest quarterly outcome since Q2 2018 — while annual growth eased slightly from 8.1% to 7.8%. 

Private sector company profits (excluding financial corporations) were up by 2.0% in Q3, though annual growth slowed from 14.2% to 13.2%. This strength has mainly centred on mining companies due to the tailwind from elevated commodities prices against a subdued picture from the non-mining sector. Financial corporations' profits increased by 0.5% in the quarter — its softest rise since Q4 2017 — as growth over the year slowed from 5.5% to 4.7%. 

Wages and salaries as measured by the Compensation of Employees figure increased by 1.1% in Q3, with annual growth down a fraction from 5.0% to 4.9%. The nation's wages bill has been trending higher over the past couple of years reflecting robust employment growth.

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GDP — Q3 | Production: GDP (P) 0.4%q/q, 1.9%Y/Y

The production estimate for GDP in Q3 was 0.4%; in line with the income estimate but softer than the expenditure outcome, while annual growth firmed from its decade low of 1.6% in Q2 to 1.9%.

Output in Q3 was weighed by; agriculture (-2.1%), other services (-1.7%), wholesale trade (-0.7%), manufacturing (-0.6%), transport (-0.4%) and utilities (-0.3%). As a consequence of severe drought conditions, output in the agriculture sector has contracted by 6.1% over the past year. Meanwhile, the downturn in the residential construction cycle and the unwind from completing projects in the resources sector has driven a 3.3% fall in output from the construction sector from a year earlier. Also of note, production in manufacturing declined by 2.7% over the year to be broadly reflective of weakness in the sector globally in response to trade and geopolitical tensions.

The health sector continues to lead output in the domestic economy, rising by a further 2.6% in Q3 to be 8.3% higher over the year. This reflects robust growth in public spending to fund aged care services and the NDIS. Output from the mining sector has expanded notably over the past couple of years, with a ramp-up in LNG production key to its strength more recently. The industry-by-industry breakdown for Q3 and over the past year is shown in the chart, below.   

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GDP — Q3 | Prices

Economy-wide inflation as measured by the GDP deflator lifted by 0.7% in Q3, which saw annual growth pare back slightly from 3.8% to 3.7%. However, growth has accelerated since reaching its most recent trough of 0.8% in Q1 2018 and reflects the escalation in the terms of trade over this period. The Gross National Expenditure deflator abstracts for this impact and continues to show modest growth at 0.5% in the quarter and 1.7% over the year. 

On a headline basis, the Consumer Price Index (CPI) lifted by 0.5% in Q3, while the annual pace firmed from 1.6% to 1.7%. Within the National Accounts, the household consumption deflator is a close proxy, though it is based on dynamic consumer spending rather than the 'fixed basket' methodology in the CPI, with this measure rising by 0.5% in the quarter and annual growth lifting from 1.9% to a 5-year high at 2.0%.   

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GDP — Q3 | Productivity

Weakness persists in national productivity and has been a structural headwind for wages growth over recent years. Growth in total hours worked lifted by 0.7% in the quarter, and as this was faster than the rate of output growth at 0.4%, GDP per hour worked contracted by 0.2% in Q3. A similar dynamic is evident over the past year; growth in hours worked is up by 2.0% compared to output growth at 1.7%, thus GDP per hour worked has contracted by 0.2% over the period.

Looking at the market sector (excludes the public sector), hours worked lifted by 0.3% in the quarter to be up by 1.5% through the year. However, this was faster than the pace of output growth recorded by the sector and as a result, GDP per hour worked fell by 0.1% in Q3 and was down by 0.2% on a year earlier, though it is at least on an improving trajectory. Real GDP per capita was flat in Q3 following modest gains of 0.1% and 0.3% in the previous two quarters. Annual growth was 0.2% and maintained its subdued pace of recent times.

In response to weakness in productivity, nominal non-farm unit labour costs increased by 0.6% in Q3 and while annual growth slowed from 3.4% to 3.0%, this pace is around its highest in 8 years. In real terms, non-farm unit labour costs were flat in the quarter and down by 0.9% over the year. Overall, the inflationary pulse is likely to remain soft in line with an elevated level of spare capacity in the labour market.   

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GDP — Q3 | States

In New South Wales, demand lifted by 0.3% in Q3 improving from a soft 0.1% in the previous quarter, though annual growth slowed from 1.5% to 0.6% — its weakest pace since Q2 2013 — and is down sharply from a 3.6% pace a year ago. Driving the slowdown has been household consumption, which lifted by 0.2% in Q3 as the annual pace softened to 0.8% to be at its weakest since the GFC impacted by earlier weakness in the established property market as prices corrected. Residential construction is in its sharpest downturn in 18 years with activity having fallen by around 17% over the past year reflecting weakness in approvals. Business investment lifted only modestly in annual terms (0.8%), with strength coming from non-residential construction and engineering work supported by rising public demand. 

State demand in Victoria increased by 0.4% in the quarter as growth over the year eased from 1.9% to 1.8% to be down from a 4.8% pace a year ago. Over this period, annual growth in household consumption has slowed from 3.5% to 1.3% — its slowest pace in 6 years. Though not as severe as in New South Wales, residential construction is in a downturn with activity having contracted by 2.7% over the past year. Helping to offset to this weakness has been business investment, which lifted by 4.6% in annual terms, as well as robust growth in public spending at 5.3% year-on-year. 

Turning to the other states, demand in Queensland lifted by 0.1% in the quarter and by 1.3% over the year. Household consumption growth remains subdued, while the residential construction cycle and business investment are in a sharp downturn. In South Australia, demand contracted by 0.3% in Q3 to be up by just 0.2% over the year. The weakness is being driven by subdued growth in household consumption and declining construction activity in both the residential and commercial sectors, though some offset is coming from public demand. Demand in Western Australia fell by 0.2% in the quarter and was flat over the past year. Household consumption is stronger than these figures imply at 0.1%q/q and 1.4%Y/Y, though business investment remains the clear point of weakness having contracted by 5.8% over the year as major projects in the mining sector reached completion. Tasmania led demand growth in Q3 at 0.8% and 3.3% through the year. Driving demand growth over the past year has been business investment and public demand. 

Australia's trade surplus steps down to $4.5bn in October

Australia's trade surplus stepped down by $2.3bn in October to a lower-than-expected $4.5bn reflecting declines in iron ore prices from their mid-year peak. As a result, export earnings contracted sharply in the month, while import spending lifted modestly.   

International Trade — October | By the numbers

• The nation's trade surplus stepped down by $2.345bn in October to $4.502bn in October; well below the median forecast for a $6.5bn surplus, and was the lowest monthly surplus since December 2018. September's trade surplus was revised down by the ABS in this report to $6.847bn from $7.18bn.
• Export earnings fell by 5.1% in October (-$2.205bn) to $40.750bn (prior +2.8%m/m), with annual growth pulling back from 14.6% to 6.0%
• Import spending lifted by 0.4% in the month (+$140m) to $36.248bn (prior +2.6%m/m), though annual growth slowed from 3.3% to 1.6%.

International Trade — October | The details 

Export earnings were down by 5.1% in October; their steepest monthly fall since April 2017, representing a hit of $2.2bn compared with the previous month, while annual growth was cut from 14.6% to 6.0% to be at its slowest pace since March of last year. This decline was led by non-rural goods (-6.2%m/m, +1.6%yr) reflecting an 11% fall from metal ores and minerals (mainly iron ore) on weaker prices, as coal (-5%) and other mineral fuels (LNG) (-6%) also fell in the month. Volatile non-montary gold fell by 24.7% in October to largely reverse an increase in the previous month. Rural goods saw a second consecutive monthly rise, with a 2.8% lift in October resulting in annual growth jumping from -1.2% to 10.0%. This appears likely to be driven by higher meat and cereal prices due to drought. Service exports firmed by 0.5% in October to be up by a robust 8.2% on a year earlier. 

Import spending lifted modestly by 0.4% in the month, or by $140m, though annual growth halved from 3.3% to 1.6% on a base effect. Leading the way was consumption goods with a 3.8% rise and is now up by 6.7% year-on-year as the impact of a weaker Australian dollar plays through. Intermediate goods also lifted by 2.3% in October but are down by 3.3% over the year. Capital goods contracted by 2.3% in the month and have softened by 0.6% in annual terms in line with weakness in business investment. Services declined by 0.5% in October, which slowed annual growth from 4.7% to 3.2%.        

     

International Trade — October | Insights 

The narrowing in the nation's monthly trade surplus from $6.8bn to $4.5bn in October comes due mainly to a moderation in iron ore prices from their mid-year peak. However, prices remain relatively high by historical standards and will likely continue to support national income growth. In addition, the services sector is performing strongly and is helped by a lower Australian dollar. Meanwhile, annual growth in imports remains soft in response to weak domestic demand conditions.   

Australian retail sales stall in October

Australian retail spending stalled in October in a soft start to the 4th quarter. In yesterday's National Accounts for Q3, household consumption lifted by just 0.1% in the quarter as annual growth slowed to a post-GFC low at 1.2% amid further weakness in discretionary spending as early indications were that consumers largely saved the windfall from recent RBA rate cuts and tax relief.  

Retail Sales — October | By the numbers

• National turnover was flat in the month on a seasonally adjusted basis at $A27.572bn; short of an anticipated rise of 0.3% and down on a 0.2% increase in September.

• Annual growth in turnover slowed from 2.5% to 2.1% to be at it softest pace in 2 years.
• In trend terms, turnover lifted by 0.2% in the month, with annual growth holding at 2.3%. 

Retail Sales — October | The details 

Retail turnover was little changed in October, declining by $9.0m (-0.03%) to $27.572bn, which followed increases of 0.4% in August and 0.2% in September. Annual growth in turnover has slowed to a 2-year low at 2.1%. Across the categories the detail was soft; food retailing lifted by 0.2% in the month (3.1%yr), though if this category (around 40% of total turnover) is excluded, sales ex-food fell by 0.2% in October (1.4%yr). Within this the outturns were; household goods 0.2%m/m (0.4%yr), clothing and footwear 0.2% (3.1%yr), department stores -0.1% (0.7%yr), 'other' 0.2% (3.0%yr) and cafes, restaurants and takeaway food 0.1% (1.8%yr). 

Across the states, spending declined in New South Wales in October by 0.2% (1.5%yr) and fell by 0.4% in Victoria (1.3%yr). Together, these states account for around 60% of national turnover and if combined, annual growth has slowed to its weakest pace in more than 6 years at 1.4%. 

In the other states, spending contracted by 0.5% in South Australia in October (0.8%yr), though increases were record in Queensland at 0.4% (3.7%yr), Western Australia 0.2% (3.0%yr), and Tasmania 1.4% (4.3%yr). As such, Tasmania takes over 1st place from Queensland in terms of the fastest pace of annual turnover growth in the nation — a title the sunshine state has held since March of this year.  

Meanwhile, online retail spending lifted by a healthy 8.5% in October to $1.930bn according to the ABS's estimates to be up by 13.9% over the year. At 6.5% of total retail turnover, the online segment seems poised to rise to a record high next month on the back of Black Friday sales promotions. 

Retail Sales — October | Insights

This was a disappointing update in light of the weakness in consumer spending highlighted in yesterday's National Accounts for the September quarter. Consumers are clearly cautious, with sentiment at pessimistic levels in the Westpac Melbourne Institute's monthly survey, and have focused on saving and paying down debt rather than spending the windfall from recent stimulus. 

Australian Q3 GDP 0.4%q/q; 1.7%Y/Y

The Australian economy expanded by a softer-than-expected 0.4% in the September quarter missing the median forecast for 0.5%, though annual growth lifted an above consensus to 1.7% (expected 1.6%) after revisions saw the pace in Q2 revised up from 1.4% to 1.6%. The nation's trend rate of growth is estimated to be around 2.75%. The Reserve Bank of Australia's (RBA) forecast is for annual GDP growth to rise to 2.3% by end 2019, implying that output will need to rise by around 0.7% in the December quarter for this expectation to be met. Today's report, however, will likely provide the Bank with some confidence in its assertion that the domestic economy has reached "a gentle turning point". Based on Q3's National Accounts, GDP growth has lifted to around a 2.1% annualised pace over the past two quarters compared to around a 1.1% annualised pace over the period between Q4 2018 and Q1 2019. 

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.   

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RBA ends 2019 on hold at 0.75%

The Reserve Bank of Australia Board left the cash rate on hold at 0.75% at its final policy meeting of 2019 in Sydney today. The decision statement from Governor Philip Lowe contained few substantive changes and maintained its easing bias by noting that the Board is prepared to cut the cash rate further "if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time".  

Central within the Board's deliberations in 2019 have been developments offshore, most notably in relation to US-China trade tensions and the associated negative impacts on trade flows and business investment. The governor's observation continues to be that the outlook for the global economy is "reasonable" but that the risks remain "tilted to the downside". In a more constructive tone, however, it was noted that "some of these risks have lessened recently". Following on from this, sentiment in markets has "continued to improve" and financial conditions remain supportive for businesses and households. 

Focusing domestically, the governor reasserted his recent assessment that the Australian economy has reached "a gentle turning point". Tomorrow's Q3 National Accounts are expected to show GDP growth lifted to around a 1.6% annual pace from 1.4% in Q2. From here, the Bank's outlook is constructive in assessing that growth will continue to rise to a 3% annual pace in 2021, supported by the stimulatory impact from previous interest rate cuts, tax relief, rising house prices, as well as ongoing infrastructure investment and by a resources sector which has turned the corner following a 6-year unwind from the peak of the investment cycle. The main risks continue to be seen as uncertainty around the outlook for household consumption growth, drought-related impacts, and the residential construction cycle.   

Following a soft batch of data since the Board's previous meeting, observations from the governor on the all-important labour market were unchanged in pointing out that "the Australian economy can sustain lower rates of unemployment and underemployment" and thereby justifies its easing bias. With spare capacity persisting in the labour market, inflation is only expected to be "close to 2 per cent in 2020 and 2021". 

The recent improvement in established housing market conditions continues to be led by Sydney and Melbourne, though the governor also acknowledged that price gains have now broadened into other markets as well. However, despite this backdrop, "new dwelling activity is still declining and growth in housing credit remains low".

Importantly, the governor outlined in this statement the transmission of its earlier rate cuts into the real economy is working through the channels of a lower exchange rate, rising asset prices, in turn leading to increased spending, and in boosting disposable incomes. Thus, concerns around negative impacts on confidence from low rates are not likely to be seen by the Board as an impediment to further reductions in the cash rate. For the time being, however, the approach taken by the Board is one of wait-and-see, with the governor noting that changes in monetary policy work with "long and variable lags". As such, following its three earlier rate cuts in 2019, the Board "continues to monitor developments" with the labour market and events from offshore remaining key to it acting on its easing bias in 2020. 

Net exports and public demand to support Q3 GDP growth

The last of the partial indicators in the lead-up to tomorrow's Q3 National Accounts were released by the ABS this morning, which showed that net exports and public demand will contribute to GDP growth in the quarter.  

Balance of Payments - Government Finance  — Q3 | By the numbers

• Australia's current account surplus surged to $A7.855bn; well past the median forecast of $6.1bn (prior rev: $4.669bn from $5.853bn)

• The trade surplus lifted to a new record high at $21.065bn in Q3 (prior rev: $19.266bn from $19.896bn)
• The income deficit narrowed by 10.9% in Q3 (or by $1.596bn) to -$A13.033bn (prior rev: -$14.629bn from -$13.927bn) 

• Net exports are expected to add 0.2ppt to GDP growth in Q2, which was above the 0.1ppt contribution forecast by markets, but down +0.6ppt in Q2.

• In the separate Government Finance release, public demand lifted by 1.5% in Q3 to $117.295bn. Overall, the ABS reported public demand was expected to add around 0.3ppt to GDP growth in the quarter.

Balance of Payments - Government Finance — Q3 | The details 

The nation returned to a current account surplus for the first time since 1975 in the June quarter at a revised $4.669bn, which then accelerated by a further $3.2bn over Q3 to $A7.855bn. Driving this result was a $1.8bn rise in the trade surplus to $21.065bn and a $1.6bn narrowing in the income deficit to -$13.033bn.  

The boost in the trade surplus was driven by a 2.1% rise in export earnings, which was led by the volatile non-monetary gold category (+51.2%) and services (+2.0%), though non-rural goods were soft (-0.1%) and rural goods (-3.1%) continued to be impacted by drought conditions. For imports, the total bill was up by 0.8% in the quarter, on increases from consumption goods, intermediate goods, non-monetary gold and services, though capital goods were weak (-4.3%). The ABS estimates that the terms of trade were broadly flat over Q3 (+0.4%) but are still up by around a healthy 8% over the year. In volume terms, exports increased by 0.7% in Q3 to be 3.3% higher over the year. On the import side, volumes fell for the 5th straight quarter (-0.2%) and were down by 1.5% over the year, reflective of a lower Australian dollar and weak domestic demand conditions. In Q3, net exports are expected to add 0.2ppt to activity. 

Government spending net of asset transfers lifted by 1.5% in Q3 to $117.295bn, based on a 0.9% rise in expenditure to $93.553bn and a 3.8% lift in investment to $23.742bn. The ABS reported that the expenditure component is expected to add 0.2ppt to activity in Q3, while investment is likely to have contributed 0.1ppt. 

Balance of Payments - Government Finance — Q3| Insights 

In a similar dynamic to the June quarter, GDP growth in Q3 will be supported by net exports and public demand. This comes at a time of slow growth in household consumption, soft business investment and weakness in residential construction. Overall, GDP growth in Q3 appears to have risen by around 0.6% and 1.8% over the year, which if confirmed in tomorrow's National Accounts would be an improvement from an annual growth rate of 1.4% in Q2.    

Preview: RBA December meeting

The Reserve Bank of Australia (RBA) Board meets for its final policy meeting of 2019 in Sydney today, with the decision statement from Governor Philip Lowe due at 2:30PM AEDT. At today's meeting, the Board is expected to keep the cash rate unchanged at 0.75% as waits to assess the impact of the three earlier rate cuts it delivered in June, July and October.  

At the previous meeting in November, the minutes outlined that the Board considered there to be a case for announcing a 25 basis point rate cut, however; it made the decision to remain on hold on the basis that more time was needed to allow the earlier rate cuts to work their way through the economy before it could reach a complete assessment of conditions. This is a very similar tact to that recently taken by other major central banks offshore following an earlier easing in their monetary policy stances in 2019.  

Looking back over the inter-meeting period, the key developments have been;

• From offshore: Following a third consecutive 25 basis point rate cut in October, the minutes from the US Federal Reserve's (Fed) meeting said that after this latest reduction, monetary policy would be "well calibrated" to support its constructive outlook for GDP growth, labour market conditions and inflation. Similarly, the account of the European Central Bank's (ECB) policy meeting in October confirmed the Governing Council was taking "wait and see" approach after delivering a package of stimulus measures at its previous meeting. The shift to more reactionary stances came as the US and China continued working towards finalising the phase one trade deal, risks of a no-deal Brexit diminished, and activity indicators globally pointed to a stabilisation of weakness in the manufacturing sector as services remained in a modest expansionary phase. In a similar vein, the second estimates of GDP growth in Q3 in the US and euro area were revised up to 2.1% annualised and 1.2% year-on-year respectively. However, both the Fed and ECB continued to assess the risks to the economic outlook as being "tilted to the downside". 

• In Australia: The key focus for the Board domestically is on developments in the labour market. Here, the data that came to hand was soft. On net, employment fell by 19.0k in October against an expected 16.0k rise (see here). Despite the participation rate easing by 0.1ppt to 66.0%, the national unemployment rate lifted to 5.3% from 5.2% and the underutilisation and underemployment rates increased to 13.8% and 8.5% respectively to reverse declines achieved in the previous month. Meanwhile, Q3's Wage Price Index showed a 0.5% gain in the quarter, which saw the annual pace slow from 2.3% to 2.2% (see here). The Bank's most up-to-date assessment of the labour market was outlined by Deputy Governor Guy Debelle during a speech last week in Canberra. Key observations were that strong employment growth is being met with a rising supply of workers, due largely to structural forces associated with participation by females and older Australians, while there had been a prevalence of wages growth outcomes in the 2%pa range across the economy. Overall, indications were that labour market conditions need to be tighter to generate a faster pace of wages growth that is consistent with inflation being within the Bank's 2-3% target band. This underscores the Board's easing bias, with RBA Governor Lowe outlining at a speech last week that it is prepared to lower to cash rate down to 0.25% before it considers turning to unconventional policy in the form of quantitative easing. Meanwhile, housing market conditions remained on the improve; house prices lifted by 1.7% on a national basis in November according to CoreLogic, while owner-occupier housing finance approvals saw a sharp 3.6% rise in September (see here).  

While the soft domestic labour market data are likely to reaffirm to the Board that the case for a further easing in the cash rate could be made, expect there to be no change today. Instead, the more likely approach from the Board will be to wait on tomorrow's Q3 GDP data and reassess the overall situation next year at its February meeting. By then, it will hope to have a clearer insight into global developments and how the domestic economy has responded to interest rate cuts and tax relief. This approach would keep it in line with the wait-and-see stance taken by other central banks offshore, while still retaining an easing bias. For reference, markets are pricing in only around a 10% chance of a 25 basis point rate cut today.

Australian inventories -0.4% in Q3

Australia's September quarter Business Indicators data were softer than expected in terms of inventories and company profits, though wages and salaries remained solid.  

Business Indicators — Q3 | By the numbers 

• Inventories contracted by 0.4% in Q3 to $164.6bn. Markets had anticipated a 0.2% decline following a sizeable 1.0% fall in the June quarter. From a year earlier, the contraction in inventories steepened from -0.3% to -0.9%.

• Company gross operating profits fell by 0.8% to $97.5bn against a forecast rise of 1.0% (prior rev: +4.8%). This saw annual growth ease to 9.4% from 12.9%.

• Growth in wages and salaries lifted by a further 1.0% in Q3 (prior rev: +1.6%) to $145.0bn, with annual growth holding at 4.8% after taking into account an upward revision from Q2. 

Business Indicators — Q3 | The details

Australian firms reduced inventories by 0.4% in Q3 — more than anticipated by markets — however, this was much lower than the 1.0% fall from Q2. As such, after subtracting a sizeable 0.5ppts from GDP growth in the June quarter, inventories are now expected to contribute around 0.2ppt to activity in Q3. However, the annual decline in inventories of -0.9% is the weakest result since the first half of 2014 and is reflective of soft demand conditions. The decline in inventories was led by the retail sector (-1.9%q/q, -0.4%Y/Y) followed by manufacturing (-0.7%q/q, -0.4%Y/Y).

Headline company profits fell by 0.8% in the quarter but are still up by a robust 9.4% year-on-year. The decline in Q3 was driven by the mining sector (-2.1%), which slowed annual growth from 31.8% to 21.5%. In the non-mining sector, profits were flat in Q3 (0.1%) to be up by a subdued 2.2% over the year and little changed from Q2. Note, however, that the methodology by which profits are calculated varies between this survey and the National Accounts. After an inventory value adjustment is made, profits were up by 1.5% in Q3. 

  

The wages and salaries estimate is the key partial for the Compensation of Employees figure in the National Accounts. Growth in wages and salaries paid was up by 1.0% in Q3, which was softer than the previous two quarters at 1.2% in Q1 and 1.6% in Q2. This measure is driven by employment growth and hours worked. According to the ABS's Labour Force Survey, the former lifted by 0.7% over the three months to September, while hours worked were up around 0.9% for the quarter. Wednesday's National Accounts will confirm details on hours worked.  

Business Indicators — Q3 | Insights

Inventories are expected to add modestly to GDP growth in Q3, by around 0.2ppt, which would only partially offset the sizeable drag from Q2. Company profits are also likely to be slightly positive in Q3. Meanwhile, robust employment growth continues to drive the nation's wages bill.