Big GDP Miss Fuels Rate Cut Speculation

By Glenn Dyer | More Articles by Glenn Dyer

Australia’s economy is not as hot as everyone thought.

Australia’s September quarter GDP has disappointed expectations by a long way, slowing sharply to just 0.3% (seasonally adjusted) from the June quarter (when it grew 0.9%), and well below expectations for a 0.6% rise, with some forecasts above that level.

That took the annual growth rate to 2.8%, well below the 3.3% the market had been forecasting and the revised 3.0% in the June quarter (3.4% first reported for the June quarter).

The 0.3% quarter on quarter growth (seasonally adjusted) was the slowest for two years. Economic growth is now clearly less than the Reserve Bank’s estimates at around 3.5% through this year.

The slow down saw the AMP’s chief economist, Dr. Shane Oliver, change his forecast from no change in rates until 2020 to a rate cut late next year.

“A bottoming in mining investment, improving non-mining investment, strong infrastructure spending and strong export earnings should support growth going forward but are likely to be offset by the downturn in housing construction and house prices weighing on consumer spending.

“As such growth is likely to be stuck around 2.5-3% over the year ahead.

“Given the combination of falling house prices, tightening credit conditions and constrained growth which will keep wages growth weak and inflation below target we are changing our view on the RBA from being one of rates on hold out to the second half of 2020 to now seeing the next move being a rate cut.

“However, with the RBA still seeing the next move as being up it will take them a while to change their thinking so we don’t see rates being cut until second half next year.

“When it does start cutting the RBA will likely stick to 0.25% increments and since rate moves are a bit like cockroaches there is likely to be more than one,” Dr. Oliver wrote yesterday after the National Accounts were issued.

The GDP report helped send the stock market lower by more than 44 points which had been sold off from the start of the session after the miserable day on Wall Street on Tuesday.

The ASX 200 ended down around 44 points at the close, which the Aussie dollar lost more than half a cent to trade around 72.89 after getting trading around and above 73.40 US cents overnight.

The local GDP result was driven by headline figures in public infrastructure spending, resource exports and the jobs boom which have masked some of the realities for over-extended workers being frustrated by historically low wage growth.

Consumer spending slowed quarter on quarter easing to a rise of 0.3% from 0.7% in the previous quarter

“Looking forward, apart from quarterly volatility, consumer spending is likely to remain under pressure.

“Yes, employment growth has been strong but this is likely to slow, wages growth is likely to remain weak (with average earnings up just 0.2% quarter on quarter or 1.2% year on year in the September quarter) and households are unlikely to have the confidence to run down their saving further in the face of declining home values.

(While the household saving rate was revised up it’s still just 2.4% which is down from around 9% in 2011 and more than a 10 year low). Likely fresh tax cuts next year might help but it’s doubtful they will be enough,” Dr. Oliver wrote yesterday.

Households have been dipping into their savings to support the economy, with the household savings ratio falling to its lowest level in more than a decade of 2.4%.

But in the June quarter, the ratio was reported to have fallen to an all-time low of 1% which has been revised up to 2.8%, so the household savings ratio remains a very imprecise way of measuring savings.

“The subdued growth in gross disposable income coupled with an increase in household consumption resulted in the household saving ratio declining to 2.4 percent in the September quarter,” said the ABS’s Mr. Hockman.

Economists at the National Australia Bank said in a commentary that NAB “While the softer outcome confirms our outlook for the economy – we had expected growth to slow in year-ended terms through the second half of 2018 and into 2019 – the data challenges the RBA view that growth will ‘average around 3½ percent over this year and next’.

“In the quarter, growth was supported by a solid rise in net exports and continued strong growth in government spending. The household sector was notably softer, with consumption making a small contribution and investment in dwellings lifting slightly.

“Business investment detracted from growth – with a further decline in the mining sector offsetting a rise in the non-mining sector. Wage and price variables – though dated – confirm that price pressures in the economy remain weak.”

And the AMP’s chief economist, Dr. Shane Oliver said The Australian economy slowed back to a subpar pace in the September quarter after a brief spurt.

“A bottoming in mining investment, improving non-mining investment, strong infrastructure spending and strong export earnings should support growth going forward but are likely to be offset by the downturn in housing construction and house prices weighing on consumer spending.

“As such growth is likely to be stuck around 2.5-3% over the year ahead. Given the combination of falling house prices, tightening credit conditions and constrained growth which will keep wages growth weak and inflation below target we are changing our view on the RBA from being one of rates on hold out to the second half of 2020 to now seeing the next move being a rate cut.

“However, with the RBA still seeing the next move as being up it will take them a while to change their thinking so we don’t see rates being cut until second half next year.

“When it does start cutting the RBA will likely stick to 0.25% increments and since rate moves are a bit like cockroaches there is likely to be more than one. This, in turn, will ultimately weigh on the Australian dollar.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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