GDP growth disappoints, sliding into "GDP per capita recession": Shane Oliver

GDP growth disappoints, sliding into "GDP per capita recession": Shane Oliver
GDP growth disappoints, sliding into "GDP per capita recession": Shane Oliver

EXPERT OBSERVATION

Australian GDP growth rose by just 0.2% in the December quarter and annual growth slowed to 2.3% year on year. This was below market expectations of 0.3% and also below the RBA’s forecast of 2.75% for the year to December.

Australia was not immune to the slowdown in global growth in the second half of 2019, with today’s GDP data showing that growth slowed significantly in the second half of 2018, with both September and December quarter GDP numbers very weak.

A lot of the focus from today’s numbers will be on a “GDP per capita recession” which means that GDP per person in Australia went backwards for two quarters in a row (by -0.1% in the September quarter and by -0.2% in the December quarter). The last time this happened was in early 2006.

While this may cause some concern about a potential actual recession in Australia we do not see this as likely at this stage, although it’s a risks and we do see GDP growth remaining below potential in 2019.

The soft GDP outcome in late 2018 still stands at odds with the strength in employment which can be explained by a fall in productivity growth (with GDP per hour worked in the market sector down by 0.2%) and the fact that jobs growth normally lags economic growth.

Source: ABS, AMP Capital

The main takeaways from the December quarter GDP data are:

  • Consumer spending rose by 0.4%, contributing 0.2 percentage points to December quarter GDP, and annual growth slowed to a very low 2%. Evidence of the wealth effect from the fall in home prices is playing out with the savings ratio rising to 2.5% from 2.3% in the prior quarter. We expect wages growth to remain constrained at just over 2% and further slowing in home prices will cause households to boost savings which means that consumer spending looks set to remain weak over 2019. Some relief may be provided from tax cuts post budget/election.
  • Housing investment fell by 3.4% and detracted 0.2 percentage points from growth. Falling building approvals means that housing investment will continue to detract from growth.
  • Underlying business investment (which takes into account asset transfers between the private and public sector) rose by 0.7% and contributed 0.1 percentage points to growth. The outlook for non-mining investment is improving, particularly for manufacturing, and mining investment looks like it start to lift again after falling since 2012 as commodity prices have held up well.
  • Underlying government spending (which takes into account asset transfers between the private and public sector) rose by 1.4% and contributed 0.3 percentage points to growth.  The infrastructure spending boom (largely thanks to stamp duty collections from the booming housing sector along with some asset sales) from state governments continue to drive government spending higher but the pipeline of government projects in construction will peak this year.
  • Inventories contributed 0.2 percentage points to growth, with a build up in farm inventories.
  • Net exports detracted 0.2 percentage points from growth with a fall in exports and a small rise in imports. The outlook for export growth is still reasonable given that the Chinese economy should see improved growth into the second half of this year as policymakers are stimulating growth via household and business tax cuts and easing liquidity for lenders.
  • Inflation pressures and wages are still low. Inflation as measured by the private final consumption deflator was just 0.3% higher in the December quarter or 1.7% year on year. Average compensation per employee was up by 0.5% or 1.7% over the year which is well below the wage price data (of 2.3% year on year).

Implications:

With the GDP numbers providing a backward looking confirmation of the weak growth in the economy at the end of 2018, it is important to look at more recent data releases but these have been mixed.

Business confidence is holding up, but is not strong, consumer confidence is okay but other consumer spending indicators are soft (poor motor vehicle sales, low retail spending), underemployment remains elevated and home prices are falling.

We see national home prices continuing to decline, with another 5-10% fall still to go over the next year which we think will detract another 1% from household consumption via the wealth effect.

In contrast, the RBA believes that home prices are close to their bottom which indicates that the central bank is probably underestimating the impact of the housing downturn on the economy, particularly in terms of its impact on consumer spending.

Our negative view on the housing market and its impact on consumption means that we see the RBA cutting interest rates later this year, with the first 0.25% rate cut in August followed by another 0.25% in November.

The first move could come earlier, but with the RBA clearly reluctant to cut interest rates there needs to be signs of further slowing in home prices, retail sales and employment (all of which we expect in the months ahead) before the RBA acts and it will likely want to see the outcome of the coming budget and Federal election.

While we expect growth to disappoint in 2019 (we see GDP growth averaging around 2-2.5% this year) strong population growth, okay corporate earnings growth, potential household tax cuts, high commodity prices, RBA interest rate cuts and a stabilisation in global growth should help avoid a recession.

SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital

Tags: 
Rba Rate Decision Gdp Growth

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