Output grew by 0.5%qtr, 1.4%yr – as expected. Annual growth is the slowest since the GFC, Q3 2009.

Q2 GDP

National output grew by 0.5% in the June quarter, meeting our expectations.

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Annual growth slowed to 1.4%, a sharp loss of momentum from 3.1% a year ago. This pace is below that of population, 1.6%, and is the slowest pace since the GFC, September 2009.

Key surprises

The quarterly report card for the Australian was broadly as anticipated.

Details

  • Real GDP: 0.5%qtr, 1.4%yr
  • Nominal GDP: 1.2qtr, 5.4yr
  • Terms of trade: 1.5%qtr, 8.9%yr
  • Hours worked: 0.1%qtr, 1.6%yr
  • Domestic demand: 0.3%, 1.0%yr
  • Inventories: -0.5ppts qtr
  • Net exports: +0.6ppts qtr
  • Consumer spending: 0.4%qtr, 1.4%yr
  • Home building: -4.4%qtr, -9.1%yr
  • Business investment: -0.4%qtr, -1.6%yr
  • Public demand: 1.4%qtr, 5.5%yr
  • Farm output: -2.4%qtr, -8.3%yr
  • Wage incomes: 1.3%qtr, 5.0%yr
  • Wages (average earnings non-farm sector): 0.8%qtr, 2.2%yr
  • Household consumption deflator: 0.6%qtr, 1.9%yr
  • Household saving ratio: 2.3%, down from 3.0% in Q1 and down from 3.2% a year earlier.

Comments

The economy lost considerable momentum from mid-2018, led by the turning down of the housing sector (after peaking in mid-2018) and by the consumer.

These are challenging times. The Australian economy is navigating a period of cyclical weakness, centred on construction, particularly housing after a tightening of lending standards. There are powerful structural headwinds from weak wages growth and productivity, constraining consumer spending. The global economy is slowing and downside risks have intensified as the global trade and technology war escalates, denting business confidence and business investment plans.

Looking ahead, recent policy stimulus (tax cuts and interest rate cuts) will provide a boost to activity – but given the weak starting point and the powerful headwinds – the risk is that growth remains below trend over the remainder of 2019 and through 2020.

Currently, growth is lopsided, with a stark divide brisk government spending (in the form of public demand) and weakness in private demand (which fell by -0.04%qtr, -0.4%yr in Q2 – the weakest result since the GFC, March 2009).

In the June quarter, public demand added 0.34ppts to growth and net exports added 0.6ppts, while inventories were a major drag, subtracted 0.55ppts. Soft consumer spending added 0.2ppts to Q2 GDP.

Government spending is focused on health (particularly the introduction of the NDIS) and investment (particularly transport infrastructure), notwithstanding a dip in public investment in the quarter. Strong national income (on higher commodity prices) is helping to boost tax revenue and to fund additional spending.

The export uptrend resumed in 2019, supported by the lower dollar and new capacity in the LNG sector. Imports are contracting at a time of weak demand.

Home building activity is contracting at a sharp pace, -4.4%qtr, -9.1%yr – subtracting 0.5ppts from annual growth. Further falls are in prospect, with approval down around 25% to 30% from earlier highs.

Business investment is patchy, -0.4%qtr, -1.6%yr, in a challenging domestic and global backdrop – which is clouding the outlook, particularly for equipment spending.

Consumer spending – accounting for 57% of the economy – came in around expectations with a 0.4% gain in the quarter, slowing annual growth to just 1.4%yr, marking the slowest pace since June 2013.

The mix showed a lift in retail items consistent with the slightly improved retail sales result, and steady gains for services and vehicle operations partially offset by a sharp decline in vehicles.

Spending has been stalled around this pace for the last four quarters, marking a slight decline in per capita terms.

The update on household incomes was mixed with a robust gain in labour income offset by weakness in non-labour incomes and another solid rise in tax payments.

Nominal labour income rose by 1.2%qtr, to be up 5.0%yr, the highest since early 2018. However, non-labour income declined in the quarter, reflecting continued weakness in profits for unincorporated enterprises (i.e. small businesses and farms) and a decline in secondary income reflecting the unwind of weather-related insurance payouts in Q1.

With income tax payments also posting another solid 2.3% rise in the quarter, real disposable incomes were actually down 0.3%qtr overall, annual growth holding at just 0.6%yr. With disposable income declining in the quarter, all of the lift in spending was ‘funded’ by a decline in the savings rate which moved from 3.0% in Q1 to 2.3% in Q2. A rising savings rate continues to present a major risk to demand going forward.

Implications for Monetary Policy: Bill Evans, Chief Economist

In its Statement on Monetary Policy for August the RBA forecast growth of 1.7% for the year to June 2019. Relative to the timing of that forecast we can only conclude that the result will be disappointing.

The result also puts the 2019 and 2020 growth forecasts at risk. To achieve the RBA’s forecast of 2.5% growth for 2019 the second half of 2019 will need to register growth of 1.6% (more than 3.0% annualised). That now seems out of reach and makes the assumption of a “leap” to 2.75% in 2020 even more heroic. In that regard, the partials around retail and residential building activity that we have seen for the start of the September quarter are also disappointing.

These results therefore further strengthen the case for a rate cut in the very near term. Recall that the RBA’s August forecast of 2.5% growth in 2019 already assumed rate cuts in both 2019 H2 and 2020 H1.

Westpac still sees the best timing for this cut at the next Board meeting in October, particularly taking the lead from an expected cut from the US Federal Reserve on September 18.
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