Q4 Real GDP: 0.2%qtr, 2.3%yr. Economy slowed sharply in the second half of 2018 around housing and the consumer.
Q4 GDP
- Output growth was 0.2%, meeting our expectations (market median 0.3% and Westpac 0.2%).
- This follows results for the past three quarters of: 1.1%; 0.8% and 0.3% for Q3.
- Annual growth slowed to 2.3% (vs Westpac forecast 2.4%), moderating from 2.7% in Q3 and down from 3.1% in mid-2018.
Key surprises
- The December national accounts provided no major surprises. Headline GDP and the detail around the consumer were broadly as anticipated, so too information on housing, investment and public demand.
Details
- Real GDP: 0.2%qtr, 2.3%yr
- Nominal GDP: 1.2%qtr, 5.5%yr
- Terms of trade: 3.2%qtr, 6.1%yr
- Hours worked: 0.4%qtr, 1.5%yr
- Domestic demand: 0.3%, 2.5%yr
- Inventories: +0.15ppts qtr
- Net exports: -0.14ppts qtr, ppts yr
- Consumer spending: 0.4%qtr, 2.0%yr
- Home building: -3.4%qtr, 2.5%yr
- Business investment: 0.7%qtr, -0.2%yr
- Public demand: 1.4%qtr, 6.2%yr
- Farm output: -4.0%qtr, -5.8%yr
- Wage incomes: 0.9%qtr, 4.3%yr
- Wages (average earnings non-farm sector): 0.5%qtr, 1.8%yr
- Household consumption deflator: 0.3%qtr, 1.7%yr
- Household saving ratio: 2.5%, up from 2.3% in Q3 but down from 4.2% a year earlier.
Comments
The economy lost considerable momentum in 2018, slowing from around a 4% annualised pace in the first half of the year to around a 1% pace in the second. This was centred on housing and the consumer against the backdrop of a further tightening of lending standards and persistent weak wages growth. A negative supply shock from the drought in NSW and surrounds is another negative.
Mid-2018 was the turning point for new home building, with strong gains now giving way to sizeable declines. The slump in dwelling approvals points to the downtrend continuing in 2019.
Consumer spending came in around expectations with a 0.4% gain in the quarter slowing annual growth to just 2.0%yr, marking the slowest pace since 2013.
Importantly, the second soft quarterly result in a row breaks the choppy quarterly pattern over recent years, confirming the underlying slowdown in demand.
Also notable, revisions were minor. The RBA has noted in recent commentary that spending estimates have been volatile and prone to revision, implying that some upward revision to recent soft estimates was possible.
The update on household incomes was a little better than the previous three quarters, which showed no net gain in real disposable income, but still on the soft side.
Nominal labour income posted a decent 0.9% rise with the September quarter gain marked up to +1.3% and annual growth at 4.2%yr.
Real disposable incomes rose by 0.5%qtr, but are only up 0.4%yr.
Notably, shifting savings behaviour added a slight headwind to demand in the December quarter, the savings rate rising from falling from a downwardly revised 2.3% in Q3 to 2.5% in Q4.
That would be consistent with a diminished ‘tailwind’ from wealth effects on spending. While at this stage the move is from a declining savings rates to stabilisation, the risk going forward is that rising savings rates create a further headwind to demand.
Business investment was mixed, with equipment spending up only 0.2% and commercial building work inching 0.1% higher.
Public demand remains a source of strength, with growth well above trend. Spending on health and on transport infrastructure projects are trending sharply higher. Tax revenues have been boosted by higher profits (centred on mining).
Exports fell by 0.7% over the second half of 2018 dented by the drought and supply disruptions in the resource sector. Net export subtracted 0.2ppts from Q4 activity.
Reserve Bank’s Response: Bill Evans, Chief Economist
This GDP print indicates that the Australian economy slowed in the second half of 2018 from around a 4% annualised pace in the first half to a 1% annualised pace in the second half.
Information around consumer spending was soft, with a rise of only 0.4% in Q4 following a 0.3% increase in Q3. Annual growth for consumer spending is now 2.0%, down from 2.9% in June.
The challenge for the Reserve Bank will be to credibly maintain its GDP growth forecasts at 3% in 2019 and 2.75% in 2020. Expecting a lift in the growth momentum from 1% to 3% could only really be justified if the economy was expecting to benefit from a significant stimulus. But global growth is slowing; the residential construction cycle has clearly turned; the AUD remains in a stable range; monetary policy is on hold and fiscal policy will continue to be constrained by the perceived need of both political parties to predict a surplus in 2019/2020.
Consequently the Reserve Bank is likely to see the need to further revise down its growth forecasts when it announces its revised forecasts with the May Statement on Monetary Policy.
Those are likely to have an upper bound of 2.75% in 2019 and 2.5% in 2020. That is a “trend” forecast for 2019 and slightly below trend in 2020.
Such forecasts are likely to still be assessed as consistent with steady policy with a clear “easing” bias.
With the residential construction cycle now turning down; business investment mixed; the savings rate now edging up; and house prices and new lending contracting, prospects for being able to maintain those forecasts in August look bleak. We expect by the August Statement on Monetary Policy the growth forecasts for both 2019 and 2020 will have both fallen below potential (2.75%); probably not to Westpac’s current forecasts of 2.2% in both years but sufficiently below trend to invalidate any forecast of a falling unemployment rate and solid wages growth.
In such circumstances, with 150 basis points of “flexibility” the Bank is expected to cut the cash rate by 25 basis points to 1.25% in August and follow that up with a second cut of 25 basis points in November recognising confirmation of persistent below trend growth.
Under such a benign growth outlook it will also be necessary to further push back on the expected timing of the return of underlying inflation into the 2-3% target band.
This expected scenario is consistent with Westpac’s forecast for two rate cuts in August and November.
