Australia’s record breaking continuous economic expansion has entered its 29th year with the Q3 2019 GDP report. That is a significant and positive achievement. Over recent years, however, the achievement has started to tarnish. Real annual GDP growth has run below 3% long-term average, most recently 1.6% y-o-y in Q2 2019 and 1.7% in Q3. Growth has been almost entirely driven by population growth while productivity has faltered. GDP generated per head was flat in Q3 and up only 0.2% y-o-y compared with Q3 2018. GDP per hour worked was worse, down 0.2% in Q3 and down 0.2% compared with Q3 2018.
In terms of spending-based GDP the story over the past year is that Australia has been saved from slipping into recession by growth in government spending and exports.
Government spending has grown strongly over the past year, but not the type of government spending – infrastructure spending – that might generate longer term economic growth and help to lift productivity. Government consumption spending rose 0.9% in Q3 and was up 6.0% compared with Q3 2018. Government capital expenditure was up 1.9% q-o-q, an impressive lift, but was up only 0.2% compared with Q3 2018.
There is some hope that Government capital spending might lift more strongly over the next 12 months with talk that around $A4.5 billion (about 0.2% of annual GDP) of “shovel-ready” infrastructure projects budgeted beyond next financial year will be brought forward into 2020-21. Much more will be needed, however, to add materially to GDP growth prospects.
Exports were up 0.7% q-o-q in real terms in Q3 and 3.3% y-o-y another important contributor to GDP growth. There is some hope that strong export growth will continue over the next 12 months even in a world of high international trade tension. Rising local infrastructure spending initiatives in China, for example, promise to keep iron ore demand comparatively strong.
Apart from Government spending and exports the rest of the Australian GDP story has been one of unusually soft growth – household consumption spending up only 0.1% in Q3 and 1.2% y-o-y – or falls, dwellings, -1.7% q-o-q and -9.6% y-o-y; private non-dwelling construction, up 0.6% in Q3 but down 4.1% y-o-y; and private investment in machinery and equipment, -4.2% q-o-q and -1.1% y-o-y.
Household disposable income had one of its bigger quarterly gains of recent years in Q3 boosted by income tax cuts. Rather than spending the tax cuts it appears households have turned cautious and saved more. The household saving ratio rose sharply from 2.7% in Q2 to 4.8% in Q3. It could be argued that Q3 is a little early for households to commit to spending more although the first monthly retail sales number for early Q4 was disappointing too, flat in October after a small 0.2% gain in September.
Other positive news for the household sector includes interest rate cuts since June and a return to rapidly rising house prices in Sydney and Melbourne over the same period. The benefits to households from these seem to be fostering saving rather than spending. Spending behaviour by households may still turn higher and the RBA is waiting to see if this happens, but the evidence of such a change so far is not promising.
There is hope that spending on new home building could improve but so far home building approvals, although erratic month-to-month are languishing down around 20% y-o-y. If the current strong buying in the housing market continues there should be a lift in new housing construction spending at some point but probably not until late 2020. There is also a worrying possibility that the rise in house prices since mid-year could falter in 2020 if employment growth is weak and unemployment rises.
Private non-housing capital expenditure has also been weak. Australian businesses face uncertainty about international trading arrangements, a domestic market where spending by households is anaemic and uncertainty about key areas of government policy in key areas such as energy. A lift in private investment spending will be essential to boost productivity and business and household incomes over time. At this stage, there is little reason to expect stronger growth in business investment spending other than in pockets of high demand.
Australia’s growth prospects look set to remain a tottery balancing act where the occasional boost whether it comes from exports, government spending or perhaps housing counters quite deep-set weakness in household consumption and business spending. While this continues the probability remains high that the RBA will ease monetary policy further. We expect another 25bps cut in the cash rate to 0.50% at the first policy meeting in 2020 in early February.