Aussie GDP Miss, Private Sector Languishes
Summary: National accounts data today highlight underlying softness in the Australian economy and the need for further stimulus measures. The private sector remains weak and the economy is currently propped up by the public sector. Household spending is sitting at levels not seen since the GFC with little reprieve on the horizon without a pickup in wage growth. We continue to argue that RBA will have to cut the cash rate again in 2020.
Australia 3Q GDP 0.4% q/q; 1.7% y/y
In the September quarter of this year the Australian economy expanded by just 0.4% q/q, missing analyst estimates of 0.5% q/q growth. Annual growth beat estimates rising to 1.7% y/y following upward revisions to in 2Q from 1.4% to 1.6%.
The quarterly pace of growth has picked up from the lows seen in the back half of 2018 (3Q18 0.3% q/q, 4Q18 0.2% q/q), so affirm the RBA’s assertions of a “gentle turning point” in the economy. But the problem being that although the worst may be over for now, below the bonnet all is not well and the economy is weak. The key weakness is in the private sector, where private demand is in recession with investment contracting, housing construction falling and household spending slowing to levels not seen since the GFC. Growth is soft and remains well below trend (approx. 2.75% y/y), household spending contributed just 0.1% to Q3 GDP, the lowest contribution since the GFC, and more importantly, looking ahead, the outlook for household spending continues to remain under pressure. Once again, the economy is not being driven by a thriving private sector and a healthy consumer, but instead it is being propped up by public spending and exports. Against the backdrop of labour market spare capacity and stagnant wages growth stunting the potential for household consumption to lift, the current protracted underperformance will be sustained for a prolonged period. We continue to expect growth to remain below trend throughout the year ahead and further stimulus measures will be implemented. The RBA remain far too optimistic and behind the curve on growth, in order to meet their 2019 growth forecast of 2.3% (which has already been revised down), Q4 GDP needs to accelerate to 0.7% q/q growth. This is highly unlikely and spells another downgrade marking to market the RBA’s rosy forecasts.
Inflation remains stubbornly low and the labour market has continued to deteriorate, for the RBA to meet its mandated inflation target and full employment goals we reiterate more stimulus will be required. We continue to expect the unemployment rate to drift higher as the construction cycle downturn spurs job losses and several quarters of below trend growth and weak private demand will weigh on employment growth in coming months. This will make it increasingly difficult for the RBA to meet their objective of 4.5% unemployment, by their estimates the theoretical level of unemployment below which inflation would be expected to pick up, hence the door is open for continued easing.
Spare capacity in labour market, as measured by both unemployment and underemployment, also remains an ongoing issue for the RBA, preventing material upward pressure on wages. This is especially problematic for consumers struggling to maintain spending against a wall of household debt. Without income growth household spending will continue to be pressured, a dynamic that is playing out in real time in the national accounts. The rate cuts already delivered by the RBA along with the tax cuts are to date having a limited effect in boosting household spending which is currently sitting at GFC levels. Consumers are choosing to add to precautionary savings and deleverage given wage growth is weak and household debt levels remain high and economic uncertainty is rising, something we flagged previously, that is now evidenced by the pickup in the household savings rate in today’s data to 4.8% from 2.7%. And although house prices have risen in the last few months any positive wealth effect is lagging given the level of indebtedness and falling consumer sentiment surveys point to rising concerns over the economic outlook. Deleveraging may be favourable for the long-term stability of the Australian economy given the current household debt to income ratio is just a little under 200%, but it is not favourable to current growth contributions.
Another factor swaying the RBA’s hand in continued rate cuts is the Australian governments promise to return the budget to surplus. Their limited appetite for implementing a complementary fiscal stimulus package leaves the RBA doing the heavy lifting with respect to the Australian economy. Dropping the surplus fixation is not politically palatable to the Morrison government and even more so now S&P Global Ratings have warned that more fiscal stimulus could put Australia's AAA credit rating in jeopardy.
We still expect the RBA will ease again in February and once more in 2020 taking the cash rate to 0.25%, the effective lower bound.