December 06, 2018

Australian GDP disappoints

The release of the September quarter of the Australian National Accounts showed lower than expected GDP growth despite wage growth and a strong private sector.

After strong growth the last two years, there may be clouds gathering over the Australian economic outlook. From a peak in the first quarter of 2018, the Australian economy weakened to the middle of the year, and then again more strongly in the three months to September. However, GDP growth remained positive at 0.3 percent quarter on quarter (seasonally adjusted).

Household consumption and government spending were both up in the September quarter, and net exports were positive in each of the three quarters of 2018. Wage growth was also positive with compensation of employees (COE) up by one percent, driven by continued strength of the private sector, though wage growth has been softening over the past 12 months. The increase in GDP has been slowing at a similar rate since March of this year as seen in the graph.

Source: Australian Bureau of Statistics

Business inventories continued to grow, as they have since September 2017. This quarter it rose by $47 million, significantly less than the increase seen in the June 2018 quarter. Most of the build-up occurred in the retail trade sector, and was partly offset by the decrease in inventories in wholesale grocery, liquor and tobacco, and other goods.

Inventories tend to shrink and grow depending how accurately businesses anticipate demand. Increasing inventories would tend to suggest reducing inflationary pressures which would be consistent with the lower than expected GDP.

Wage growth was offset by a fall in other forms of income, and income tax increases. This has resulted in a fall in the household savings ratio which remained positive at 2.4 percent. The household savings ratio continues a downwards trend since the global financial crisis.

The income tax increases and increased consumption have contributed to the government net savings rising from $7.1 billion to $8.2 billion in the September quarter, the largest positive net saving since March 2006 when it was at $9.2 billion.

Looking ahead Australia may experience a fall in consumer demand, as spending on discretionary items fell during the quarter, as well as imports of consumer goods. This together with weakness income other than wages and increased income tax would tend to combine to cause a “tightening of the belts” and a loss of momentum in the economy more widely. Commentators are predicting that the 2018 result will miss expectations and will come in below 3 percent growth for the year.