Forecasting economic growth is always difficult especially given that the latest information available on how the economy has been travelling relates to period at least two months in the past. The latest full report on Australian economic growth for Q1 2017 was released last week. Even two months after the event much of the information available to the statistician is incomplete and the growth reading is a mix of hard information, survey material and extrapolation. Q1 GDP 2017 GDP will be revised several times over the next year or two as more hard information comes to hand. Over time more hard information becomes available and Q1 GDP will be revised.
Nevertheless, there is enough information in the Q1 GDP report and the few quarters that went before to draw a few broad conclusions about how the Australian economy has been travelling. The first two conclusions are that GDP growth has become unusually bumpy through the second half of 2016 and the first quarter of 2017 and the down bumps have outweighed the up bumps pulling down annual real GDP growth below 2% y-o-y. Another conclusion is that spending on housing and consumer goods and services is past its best.
Taking the bumpiness of GDP growth first, the latest and modest 0.3% q-o-q rise in Q1 2017 GDP, follows a strong 1.1% lift in Q4 2016 and a 0.4% fall in Q3 2016. If we annualised GDP readings US-style our growth rate since mid-2016 has ranged from -2.0% to +4.4% and back down to +1.2%. This unusual volatility in GDP growth each quarter has been driven primarily by two main spending components government spending and exports. Government spending has been by far the bumpiest quarter to quarter, especially investment spending by the Commonwealth and State Governments.
Fixed capital spending by government owned corporations, for example fell by 20.9% q-o-q, in Q1 2017 after increasing by 37.8% q-o-q in Q4 2016 and by 2.3% in Q3. General Commonwealth government capital spending fell by 1.4% q-o-q in Q1 2017, after increasing by 15.1% in Q4 2016 and falling by 16.3% in Q3. Total public fixed capital expenditure accounts for only 5% of GDP, but when it has been bouncing around quite as much as it has been since mid-2015 accounts for much of the volatility in GDP quarter-to-quarter. Much of this volatility in public investment spending relates to the timing of the ramp up in many State and Commonwealth spending initiatives as well as sales of public assets. Some of the volatility will probably be ironed out in future revisions as it becomes clearer exactly which quarter spending changes should be apportioned.
Exports account for some of the quarterly volatility in GDP growth too. Exports of goods and services fell 1.6% q-o-q in Q1 2017 after rising by 3.7% q-o-q in Q4 2016 and by 1.4% in Q3 2016. Exports account for over 21% of GDP so this volatility makes a difference. Much of the fall in exports in Q1 2017 came from a reduction in exports of mineral ores and coal, not because demand for these had fallen, but because Australia was struggling to supply because of weather damage to key export transport infrastructure, especially in Queensland. That weather-damage to transport links will probably feature in another weak or negative export contribution to GDP growth in Q2 2017 as well, before some recovery in Q3 – providing demand from key export markets such as China is still holding up then.
Looking beyond the bumpiness in quarterly GDP readings, which it is probably fair to say will continue in the next quarter-to-quarter it is also noticeable that Australian annual GDP growth is losing steam, an odd development in a world where growth has mostly been gathering pace. Annual GDP growth was down to 1.7% y-o-y in Q1 2017 from 2.4% in Q4 2016 and as high as 3.1% as recently as Q2 2016.
Much of this deceleration in annual GDP growth is down to a marked weakening in spending on housing relative to where it was through the 2015-16 financial year. During 2015-16 total spending on housing grew at an average 2.7% a quarter. In the first three quarter of 2016-17 the average has fallen sharply to -1.2% a quarter. Housing spending in Q1 2017 fell by 4.4% q-o-q, the biggest quarterly fall in eight years. Housing activity has started to detract from economic growth and it seems it will continue to do so over coming quarters.
Spending on housing accounts for only 5.5% of GDP, but it tends to influence household consumption which is much bigger accounting for 57% of GDP. The slippage in household expenditure growth from an average 0.7% q-o-q in 2015-16 to 0.6% in the first three quarters of 2016-17 is far less pronounced than the slippage in housing expenditure, but it has also been working towards edging annual GDP growth lower.
Looking backwards at where GDP growth has been we can say that quarterly GDP growth has been unusually volatile and may remain volatile given the outlook for government investment spending and exports. Apart from the volatility of quarterly GDP growth we can also say that annual GDP growth is drifting lower driven by a turn towards weaker spending on housing and a slight drift lower in household consumption expenditure too. The risk is migrating towards these softer trends in housing and household consumption continuing, especially if house prices soften compromising growth in household wealth and wages growth continues to languish. The GDP data also tell us that households have only been able to spend as well as they have been (albeit at less strong pace than 2015-16) because they have been prepared to save relatively less out of income. The household savings ratio was down to 4.7% in Q1 2017 from 6.9% a year earlier in Q1 2016. If the household savings ratio stops falling, household spending would be cut back sharply and absent a sharp lift in spending somewhere else in the economy annual GDP growth would slip further.
Looking backwards at where we have been it is becoming harder to see how the economy can gather pace.