No Surprise As GDP Grinds To GFC Low

By Glenn Dyer | More Articles by Glenn Dyer

As expected the Australian economy fell to its slowest annual rate of growth in a decade in the 12 months to June after GDP came in at a slightly better than expected 0.5% for the June quarter.

Annual growth was 1.4% after a small upward revision in the March quarter’s growth estimate to 0.5% from the original 0.4%. Annual growth was the slowest since 2009 and the depths of the GFC.

A year ago annual growth in the 12 months to June 30, 2018, was 3.0% (revised down from 3.3%), so the slump has been relentless as the growth rate has more than halved in the space of 12 months.

Without the solid performance of the trade account, growth would have been negative for the quarter. Solid government spending also helped, but consumer spending was weak, households ran down savings (so much for the impact of the tax refunds) and the strong influx of immigrants also underpinned growth.

But growth was well short of the governments estimate of 2.5% and the Reserve Bank’s 1.8% estimate for the year to June.

For all the optimistic talk from the government, led by Treasurer Josh Frydenberg about how the outlook was for better times thanks to the impact of the tax refund on consumer spending, a rebound in house prices and the impact of the two interest rate cuts, early data for the current quarter doesn’t confirm that.

Since June 30 there has been no sign of any improvement in consumer demand in the economy – dwelling approvals fell 9.7% in July, retail sales fell 0.1% in the same month and car sales dropped 10% in August – that’s bigger than the fall of 2.8% in July). if this continues into August the economy will continue to drag along on the bottom.

The mining industry – especially the iron ore export sector – saved the economy (and gave us the first current account surplus in 44 years in the three months to June).

Net exports contributed 0.6 percentage points to growth reflecting strong exports of iron ore.

Mining gross value added increased 3.4%, while mining profits rose by 10.6% driven by strong export growth and a continued rise in the terms of trade (which were driven by the surge in iron ore prices which peaked in early July).

Mining investment rose 2.4%, with increases in investment in machinery and equipment. The terms of trade rose 1.6%.

The main drag came from the 0.9% slide in inventories (which detracted 0.5 points from growth) and construction (but not residential investment which again slumped).

Consumer spending remained in the doldrums, increasing by just 0.4% for the quarter – a small improvement on the pace of growth in the March quarter of 0.1%.

Household final consumption expenditure contributed 0.2 percentage points.

Investment in new and used dwellings fell 6% in the quarter, with growth through the year down by 10.9% – the story told by fall dwelling approvals in the year which has continued into 2019-20.

Government final consumption expenditure contributed 0.5 percentage points to GDP growth during the quarter and was a surprise positive (the government finance statistics are almost impossible for outsiders to work out).

The AMP’s Chief Economist, Dr. Shane Oliver wrote yesterday afternoon:

“The weakness in the Australian economy that started in mid-2018 has continued well into 2019. The make-up of growth still remains a concern as private demand fell again in the June quarter (by 0.1%) with large increases in public spending and net exports “saving” the economy.

“With consumer spending still struggling to lift noticeably, falling residential construction, moderate business investment growth, the private sector side of the economy will likely remain weak.

“A softer global environment may also infiltrate further into Australia’s external sector.

“So the risk of an Australian recession remains and can’t be ignored. However, this is not our base case partly because we expect more RBA interest rate cuts, possibly quantitative easing, and more fiscal stimulus which should help lift growth.

“If the improvement in home prices continues it would also be positive for household wealth and provide some boost to inflation.

“While the RBA kept the cash rate unchanged yesterday (Tuesday), despite knowing the weakness in July retail sales and anticipating a low June quarter GDP number, we still expect rate cuts in October and November taking the cash rate to 0.5% as global data remains weak, the unemployment rate increases and global central banks (the ECB and Fed) cut interest rates (and restart asset purchases in Europe) in September which may influence the RBA’s decision to do more monetary stimulus lest the Australian dollar rises.

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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