Mr. Micawber in Charles Dickens’ classic novel “David Copperfield” is a perpetual optimist who even when facing an imminent threat of a stint in debtors’ prison is always convinced that something will turn up to his advantage. The performance of the Australian economy has been Micaberesque since the collapse of the mining investment boom three years ago threatened to tip the economy in to recession. Something has turned up to save the economy from a series of potentially recession inducing threats starting with the massive collapse of the mining investment; then a seemingly unsustainable build-up of household debt at a time of no growth in real wages; and most recently the topping out of the housing market and related home building activity. The Australian economy has withstood these potentially recession-inducing threats and appears to be doing so again according to the latest Q3 GDP report.
Q3 GDP rose by 0.6% q-o-q lifting annual growth in GDP to 2.8% y-o-y from 1.8% in Q2. GDP showed respectable growth in the quarter despite detractions to growth from housing activity, -0.2 percentage points (pps) contribution; government spending, -0.4pps; zero contribution from net exports; and only a 0.1pps positive contribution from household consumption spending. The saviour of Q3 GDP growth was a big lift in business investment spending. Private non-dwelling construction spending (mostly engineering work) rose by 18.4% in Q3 contributing 0.9pps to growth. Spending on machinery and equipment also rose by 1.9% q-o-q contributing 0.1pps.
The big lift in private fixed capital formation came at just the right time and prevented Australia suffering a negative GDP quarter. The issue is whether Australia will remain quite so fortunate over coming quarters? There is probably good reason to suspect that growth will hold up. While private fixed capital formation is unlikely to make quite so strong a contribution to growth in Q4, it will probably make some positive contribution. Engineering works in the Eastern States of Australia are in the early stages of a boom phase involving a large ramp up in spending on road, rail and airport infrastructure as well as large scale renewal of hospitals and schools. Over the next few years, private non-residential construction work (most infrastructure spending starts in the private sector with contractors until finished when some may change to public ownership) is likely to make positive contribution to GDP growth in most quarters.
It is also likely that business investment spending on machinery and equipment will continue to rise modestly in most quarters as well making some positive contribution to GDP growth too. Australian businesses have turned more optimistic in their investment spending plans and are reporting in surveys, such as the monthly ANZ business survey, that business conditions are the best they have been since the beginning of the century.
The parts of expenditure-based GDP that either contracted or showed no or very soft growth in Q3 could also turn better in Q4. It is probably unlikely that spending on housing will stop falling in Q4. Evidence is accumulating that the house price boom in Melbourne and Sydney is over although the good news is that price declines look modest and orderly so far and there is little reason to expect anything much worse to develop over the next year or so. Nevertheless, even and orderly settling of the housing market implies housing activity consistently detracting between 0.1pps and 0.2pps from quarterly GDP growth over the next year or two.
Beyond housing activity, there is more hope of better contributions to growth from household consumption spending, government spending and net exports.
Real household consumption spending growth was unusually weak in Q3, up only 0.1% q-o-q. Q4 has already started on a much brighter note with nominal retail trade in the month of October up by 0.5% m-o-m. Although household debt is extremely high, there are signs that households are consolidating rather than extending debt loads further. This capping out of the household debt burden is also occurring at a time when it is still possible to lower the interest servicing burden on debt by refinancing and real household disposable income is starting to lift mostly because of continuing strong growth in employment. There is some hope that a tight labour market may deliver a little higher growth in wages too over the next year.
Household consumption expenditure may not rise strongly but it does look well placed to beat the unusually low 0.1% q-o-q outcome in Q3 in the current quarter, Q4 2017, and most quarters in 2018.
The fall in government spending in Q3 seems to be a temporary aberration and looks set to lift over coming quarters on rising spending on public infrastructure and more generally as a Federal Election swings in to view probably later in 2018.
The flat contribution to Q3 GDP growth from net exports is also likely to improve over coming quarters assisted by stronger global economic growth.
As Mr. Micawber would say something will always turn up. Private capital formation turned up in Q3 and saved the day. Household consumption spending, government spending and net exports could singularly or in combination turn up and save the day for GDP growth over coming quarters. Increasingly, there is good reason to be optimistic about Australia’s growth prospects in the current quarter and in 2018.