Australia: Growth disappoints in Q3, held down by weak domestic demand
GDP expanded 0.4% quarter-on-quarter in seasonally-adjusted terms in Q2, following a revised 0.6% quarter-on-quarter increase in the second quarter (previously reported: +0.5% quarter-on-quarter), according to figures released by Australia’s Statistical Institute (ABS) on 4 December. The result disappointed market analysts’ expectations of a 0.5% quarter-on-quarter expansion and underlined soft growth dynamics. Meanwhile, on an annual basis, the economy grew 1.7%, marginally up from Q2’s revised 1.6% (previously reported: +1.4% year-on-year), which had marked the weakest expansion since Q3 2009.
A slowdown in household spending and another contraction in fixed investment weighed on the domestic economy. Private consumption weakened (Q3: +0.1% qoq; Q2: +0.3% qoq), weighed on by a frail housing market, soft wage growth and high levels of debt. Additionally, a notable increase in the saving ratio frustrated the government’s efforts to boost spending through the introduction of tax cuts to low and middle incomes reflected in the sizable rise in disposable income. Moreover, fixed investment fell again (Q3: -0.2% qoq; Q2: -1.5% qoq), albeit to a lesser extent than in the previous quarter, on the back of another significant drop in dwelling investment and as tumbling mining investment weighed on business investment. Meanwhile, government spending lost pace following Q2’s surge—associated with May’s general election—but remained robust nevertheless (Q3: +0.9% qoq; Q2: +2.5% qoq).
The external sector, meanwhile, continued to support the economy, albeit less than in Q2. Exports rose 0.7% in Q3 (Q2: +1.3% qoq), supported by strong foreign sales of commodities, and imports dipped 0.3% in Q3, after contracting 1.1% in Q2, due to subdued domestic demand. The combination of higher exports, more favorable terms of trade and falling imports boosted Australia’s current account surplus compared to Q2, which had marked the first current account surplus since 1975.
Commenting on the prospects for the Australian economy going forward, and how this will likely influence the future path of monetary policy, Andrew Ticehurst, Australia and New Zealand economist at Nomura, stated:
“Growth clearly remains sub-trend, and we believe this data undermines somewhat the more upbeat narrative we heard from the Reserve Bank of Australia (RBA) yesterday. Moreover, while the level of growth remains underwhelming, we also describe the quality of growth revealed in the national accounts as poor. We continue to see further policy easing from the RBA next year, including 25bp rate cuts in Q1 and Q2, and we continue to assign an approximate 50-60% probability to unconventional policy easing, most likely in late-2020. In turn, we retain a positive view on AUD rates, expecting them to outperform US treasuries, and we maintain our cautious medium-term view on AUD.”
Growth should gather pace in 2020, underpinned by favorable financing conditions and a supportive business climate. Mining and housing investment are set to expand, which, coupled with somewhat stronger consumer spending, should prop up domestic demand. That said, a volatile external backdrop and further slowdown of the Chinese economy pose downside risks to the outlook.