Australia’s GDP growth story has been very patchy over the past two years or so and the latest Q4 2017 GDP reading added another patchy chapter. In quarterly terms, real GDP rose by 0.4% after revised gains of 0.7% q-o-q in Q3 and 0.8% in Q2. Relatively firm GDP growth in both Q2 and Q3 2017 seemed to hold promise that annual GDP growth might at last be motoring up towards a respectable 3% y-o-y (it made 2.9% y-o-y in Q3 2017), but the softer Q4 GDP result pulled the annual GDP growth rate down to 2.4% y-o-y.
Going back a little further Australia’s quarterly GDP readings were showing great promise in the first half of 2016 with quarterly increases of 1.0% q-o-q and 0.8% respectively in Q1 and Q2 before the promise was dashed by a -0.2% q-o-q reading in Q3. Quarterly GDP growth roared out of the blocks again in Q4 2016 with a 0.9% q-o-q lift but ahead of less than impressive 0.5% lift in Q1 2017.
Changing drivers of Australian growth account for much of the reason why Australia’s GDP growth rate has been noticeably choppier and rather underwhelming in what has been the best period of global economic growth in over a decade. The sharp fall away in mining investment spending in the middle years of the current decade presented one persistent lead weight holding down Australian GDP growth. Even as the negative influence of mining investment downturn faded through 2017 one major positive offset, the housing boom through 2016 and the first half of 2017, was showing signs of fading too. At the same time, a long awaited lift in non-mining business investment spending was starting to show, but slowly.
Rising exports on the back of the lift in export capacity created by the mining investment boom provided some hope for a more consistent contributor to growth. Through 2016 exports contributed to growth every quarter ranging from 0.2 percentage points (pps) in Q3 to 0.6 percentage points in Q4. Through 2017 the contribution to growth has been far more volatile ranging from -0.3pps and -0.4pps respectively in Q1 and Q4 to +0.6pps and +0.2pps respectively in Q2 and Q3. Much of the volatility in export contribution in 2017 has been weather related and while it seems highly likely that exports will contribute positively to GDP growth in Q1 2018, the weather could easily turn that contribution back to negative in Q2.
The best hope for more consistently strong Australian GDP growth rests on the willingness of Australian households to spend. Household consumption spending accounts for just under 59% of GDP. Household consumption spending invariably grows from quarter-to-quarter, but in recent years unusually slow growth in wage income and exceptionally high household indebtedness have limited growth in household spending and have made its quarterly contribution to GDP growth quite erratic. The most recent Q4 GDP reading included one of the better contributions from household consumption, +0.6pps. In contrast, the quarter before, Q3 2017, saw a contribution at the low end of the recent range for household consumption, +0.3pps.
The average quarterly contribution to GDP growth from household consumption spending through 2016 was +0.4pps and through 2017 was the same, +0.4pps. If Australia’s annual GDP growth is to lift to 3.0% y-o-y or better, the average quarterly contribution from household consumption will need to lift to +0.5pps and given other highly erratic contributions to GDP an average contribution closer to +0.6pps would place 3.0%+ 2018 GDP growth in safer territory.
Lifting the growth contribution from household consumption through 2018 will be challenging. For a start, Q1 is off to an unpromising start with retail sales lifting in January by only 0.1% m-o-m. Spending could improve from here. There are signs that the worst of the very weak phase in annual wages growth is over. Through the second half of 2017annual wages growth edged up to 2.1% y-o-y from 1.9% in the first half. Annual growth in household disposable income is lifting even faster helped by strong growth in the number of people employed. While household debt is very high, it is growing only slowly and borrowing interest rates are still low allowing households to service debt relatively comfortably.
Nevertheless, the outlook for household consumption spending is still quite uncertain. The topping out of the housing market and tighter lending requirements for investors in housing, particularly as they approach the need to roll over existing interest-only facilities could cause some households to retrench and spend less rather than more. The uncertainty surrounding the outlook for household spending and the volatility surrounding other contributors to Australian GDP growth means that growth may remain patchy quarter-to-quarter even in a world where growth seems to be becoming consistently stronger. Reaching 3% y-o-y GDP growth in 2018 in Australia looks quite a tall order.
Still patchy Australian economic growth in a stronger growth world is a key reason why the RBA is delaying as long as it can before it joins the growing international trend towards less growth accommodating monetary policy. At this stage, we pencil in a first 25bps RBA rate hike in August, but we will be watching the data closely over the next few months and admit that there is a risk that the RBA could stay on policy hold for longer.