Q3 Real GDP: 0.3%qtr, 2.8%yr. A material downside surprise, led by weak consumer spending.
Q3 GDP
- Output growth was 0.3%, which was well below expectations (market median and Westpac 0.6%)
- This follows results for the past three quarters of: 0.5% Q4 2017; 1.0% Q1 and 0.9% for Q2.
- Annual growth has slipped to 2.8%, also a downside surprise – a forecast 3.3%. The June annual growth figure was revised to 3.1% from 3.4% previously
Key surprises
- Consumer spending was weak, up only 0.3% vs an expected 0.5%. Business investment declined by more than anticipated and by more than suggested by the partials, a -1.9% vs an expected -0.8%.
Details
- Real GDP: 0.3%qtr, 2.8%yr
- Nominal GDP: 1.0%qtr, 5.2%yr
- Terms of trade: 0.8%qtr, 2.7%yr
- Domestic demand: 0.3%, 2.7%yr
- Inventories: -0.3ppts qtr
- Net exports: +0.4ppts qtr, +0.6ppts yr
- Consumer spending: 0.3%qtr, 2.5%yr
- Home building: 1.0%qtr, 7.1%yr
- Business investment: -1.9%qtr, -0.8%yr
- Public demand: 1.5%qtr, 4.5%yr
- Farm output: -1.0%qtr, -8.1%yr
- Wage incomes: 1.0%qtr, 4.3%yr
- Wages (average earnings non-farm sector): 0.2%qtr, 1.2%yr
- Household consumption deflator: 0.4%qtr, 1.8%yr
- Household saving ratio: 2.4%, moderating from 4.0% a year earlier.
Comments
The economy lost momentum moving in to the second half of 2018 centred on housing and the consumer against the backdrop of a further tightening of lending standards to the housing sector. Business investment also took a step lower, led by mining, with the completion of major gas projects.
Jobs growth remained robust in the September quarter, at +0.7%, including a 0.8% increase in full-time jobs. Drought conditions in NSW and surrounding areas, as well as supply disruptions in the mining sector, were headwinds in the period, constraining the nation’s productivity performance.
New home building activity declined in Q3, -0.8%, after recent strong gains over the first half of the year (3.5% and 3.0%). This is the start of a downturn in our view, as suggested by the trend decline in approvals
Consumer spending came in below expectations with a 0.3% gain in the quarter slowing annual growth to 2.5%yr.
The big downside surprise was around services spend which looks to have dipped in the quarter, and vehicle operations (i.e. spending on fuel).
The updates on household incomes were also soft. Labour income posted a decent 1% gain in the quarter but disposable incomes rose just 0.3% overall with weak non-wage income and increased tax payments curbing the gain in nominal terms.
In real terms, household disposable incomes dipped 0.1% in the quarter and have shown no growth at all in 2018.
That meant the gain in spending was again ‘funded’ by a reduction in savings – the savings rate falling from an upwardly revised 2.8% in Q2 to 2.4% in Q3, a post GFC low (previous historical estimates have also been revised up).
Business investment was disappointing in Q3, -1.9%, led lower by infrastructure, -8.2% (centred on the mining sector due to the recent completion of major gas projects) and by a decline in non-residential building work. The capex survey suggests that business investment will advance in the 2018/19 financial year.
Public demand and net exports were key growth engines in the quarter, a dynamic that is expected to continue. Public investment is rising sharply, with a focus on transport infrastructure, as governments play catch-up in meeting the needs of fast growing populations in our major cities, particularly Melbourne and Sydney.
Net exports are adding to growth supported by services and a lift in LNG exports as new capacity comes on stream. The Q3 outcome was held back by temporary supply disruptions which saw iron ore and coal shipments decline.
Reserve Bank’s Response: Bill Evans, Chief Economist
This result will come as a disappointment to the Reserve Bank. Note that the forecast for GDP growth in 2018 for which appeared in the November Statement on Monetary Policy was 3.5%. With the first three quarters of the year totalling 2.2% the December quarter would have to print growth of 1.3% (a 5.2% annualised growth pace) – a highly unlikely event. We can expect the Bank to lower its forecast for GDP growth in 2018 from 3.5% to 3.0% when it next releases its forecasts on February 9 2019.
That forecast will then challenge the 2019 forecast of 3.25% which appeared in the November Statement. It was reasonable for the Bank to assume some slowing between 2018 and 2019 (Westpac’s growth forecast for 2019 has been 2.7%) particularly with a more clouded outlook for global growth and a likely accelerated contraction in residential investment. (Note new dwellings contracted by 0.8% in The September quarter following two quarters which averaged 3.2% in March and June). That would immediately push the likely 2019 forecast back to around Westpac’s forecast of 2.7%.
So, this print is likely to change the Bank’s growth rhetoric of strongly above trend to slightly above trend drifting back to trend in 2019.
Westpac has consistently forecast that the cash rate would remain on hold through 2019 and 2020. If we are right that the Bank will revise down its growth forecasts on the basis of this result then lower expected growth momentum going into 2020 may also temper the Bank’s attitude to rates in 2020 as well.
