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Australia GDP Q3 2018

Australia: Growth slows in Q3 on cooling consumer spending

Australia’s economy slowed considerably in the third quarter, dragged down by a sharp slowdown in consumer spending, according to figures released by the Australian Bureau of Statistics (ABS) on 5 December. GDP expanded 0.3% quarter-on-quarter in seasonally-adjusted terms in Q3, following a 0.9% increase in the second quarter. The result significantly undershot market analysts’ expectations of a 0.6% expansion. On an annual basis, the economy grew 2.8%, down from Q2’s revised 3.1% (previously reported: +3.4% year-on-year) and coming short of market expectations of a 3.3% increase.

On the domestic front, the deceleration was prompted by a notable weakening in private consumption. Consumer spending decelerated (Q3: +0.3% quarter-on-quarter; Q2: +0.9%), owing to dropping house prices, anemic wage growth and tightening credit conditions. Average wages increased a mere 0.2% in the quarter, while household saving continued to decline as the increase in consumption, although weak, outpaced growth in gross disposable household income. Government spending also weakened in the third quarter, rising 0.5% (Q2: +0.9% quarter-on-quarter), weighed down by falling expenditure by state and local governments. Meanwhile, fixed investment expanded a meagre 0.1%, matching Q2’s reading: An increase in dwelling and machinery and equipment investment more than compensated a notable fall in non-dwelling construction—which dropped for the second consecutive quarter. Growth in fixed investment came on the back of rising public investment, while private investment saw a sizable drop. Lastly, inventories subtracted 0.3 percentage points from GDP growth, following a large increase in stocks in the prior quarter.

The external sector’s contribution to growth improved to 0.3 percentage points in Q3 from 0.1 percentage points in Q2, owing to a significant decline in imports. Imports swung from a 0.5% expansion in Q2 to a 1.5% contraction in Q3, as purchases from abroad of both consumer and capital goods shrunk owing to feeble domestic demand. Growth in exports, meanwhile, weakened significantly, expanding just 0.1% in Q3 (Q2: +1.2% qoq), due to a contraction in foreign sales of iron ore largely offsetting higher exports of services.

The economy is expected to expand at a healthy pace next year. A further tightening in the labor market should drive wages up and, coupled with moderate inflationary pressure, underpin consumer spending. Moreover, robust demand for commodities will support the external sector while fixed investment is expected to expand, albeit at a somewhat softer pace, buttressed by rising non-mining business investment and public infrastructure spending. That said, the uncertain political outcome from next year’s elections could cool investor sentiment, while escalating trade tensions could take a toll on growth.

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