Key insights from the week that was.
This week, Australia’s Q3 GDP report and the outcome of the December RBA Board meeting provided a broad update on the health of Australia’s economy and its outlook. Offshore, the growing divergence between developed and developing markets’ growth prospects remained in focus.
Q3 GDP for Australia came in slightly under the market’s expectation at 0.6%, 6.9%yr. Household spending was the key support in the three months to September, with a further reduction in the savings rate and robust nominal income gains facilitating a 1.1% lift in consumption. This does however represent a clear slowdown in the pace of consumption growth from the first half of the year, indicating that the reopening effect is fading.
As spending patterns continue to normalise and the full effect of rapidly rising interest rates and inflation’s hit to real incomes is felt, consumption growth will slow further. Some components of household spending are already beginning to wilt under these headwinds, as evinced by the 11.2% decline in real estate turnover which subtracted 0.2ppts from GDP growth in Q3. Conditions for business investment meanwhile remain mixed. In short, supply issues, and on occasion the weather, are limiting the pace at which the sector’s pipeline of work can progress. Though, with capacity tight and tax incentives continuing to support, business remains constructive on the outlook for investment over the coming year.
After 13 consecutive quarters of surplus, Australia’s current account meanwhile slipped into deficit in Q3, ending the longest run of surpluses in the history of the series which dates back to 1959. This was predominately driven by the trade surplus narrowing from $42bn at June to $31bn in September – still an elevated level versus history. As was subsequently highlighted by the October trade balance, in part due to global conflict and uncertainty, fuel and food exports are at record highs and are likely to show continued strength. Note though, the flip-side of record resource sector profitability is an outsized flow of dividends to foreign shareholders. In Q3, Australia’s net income deficit rose to 4.4% of GDP, roughly in line with the peak during the 2007 commodity price boom.
Commodity markets were a broader point of discussion for the Westpac Economics team this week, both with respect to the diverging growth prospects of developed and developing nations heading into 2023 and amid the global green transition. Our newest video series ‘Commodities in Transition’ seeks to delve deeply into both with a view to assessing the implications for Australia’s exports and national income.
On Australia’s outlook, the December RBA Board meeting was also informative. As discussed by Chief Economist Bill Evans, having delivered another 25bp hike, the RBA retained its tightening bias heading into the new year, noting the “Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course”. Further, concern continued to be shown over the potential threat to the economy of high inflation becoming entrenched. Westpac continues to expect additional 25bp increases at the February, March and May meetings, taking the cash rate to a peak of 3.85% which is then expected to be retained until 2024, when we see a series of interest rate cuts beginning.
Moving offshore, the market this week showed increasing confidence in China’s outlook and, by association, that of developing Asia. The two have a strong connection, with China receiving a large and growing dividend from Asia’s economic development and, ahead, their shift to renewable power generation and society’s electrification – structural changes which China has a leading role in globally.
However, the focus of most market participants currently is China’s path out of COVID-zero. On this front, news remains positive, with a further easing of testing and isolation rules seen over the week as well as the relaxation of the requirement to show a negative test to enter public transport, retail and offices in major tier 1 cities. Authorities are also working hard to improve confidence amongst consumers, the intent being to increase households willingness to spend in line with their capacity. A progressive end to COVID-zero restrictions at the same time as residential construction begins to rebound and investment in heavy and technological infrastructure continues to show strength is a heady mix for China GDP growth, which we see rebounding from 3.5% in 2022 to 6.0% in 2023.
Finally to the US and Europe. Ahead of their final central bank meetings for 2022 next week, comments by policy makers and the data flow was very light. For the US, a strong nonfarm payrolls print last Friday and ISM services report this week has done little to assuage the market of growing fears of recession in 2023, with the S&P Global services PMI in contrast signalling a weak state of affairs for small and medium-sized firms in the sector.
As we have long argued, albeit for different reasons, the risks of recession in the US are similar to those for Europe heading into the new year. It is therefore unsurprising that both the US dollar and US term interest rates are near their recent lows as we go to print. With European risks to crystalise earlier in 2023 than the US, we forecast a trend decline in the US dollar over the coming year, continuing into 2024 as rate cuts commence in both jurisdictions.
