Australian GDP Preview: Q3 2016

The income measure of GDP is likely to be mixed, but stronger than the expenditure measure

Key points:

Q3 GDP data will be released on Wednesday 7 December at 11:30 AEDT. Additional partials will be available next week prior to the GDP release.

Economic partials point to a small contraction in real GDP in Q3 of -0.2% q/q. This follows moderate growth in Q2 (0.5% q/q) and strong growth in Q1 (1.0% q/q). The year-ended rate of growth will slow sharply to 2.1% from 3.3% in Q2.

The expenditure measure of GDP is looking particularly weak with partial data pointing to a broad-based decline in business investment, a surprise contraction in dwelling investment and a subtraction from net exports (-0.3ppt). Household consumption growth is expected to be subdued (0.4%q/q), with particular weakness in retail trade. There is also downside risk to our forecast for public demand.

The income measure of GDP is likely to be mixed but stronger than the expenditure measure. Higher commodity prices will see the terms of trade rise 4.3% following a 2.2% increase in Q2, as key commodity prices such as coal and iron ore increased (although larger increases will fall into Q4). This will flow through to positive growth in company profits, although labour income is forecast to increase moderately due to soft employment and low wages growth in the quarter.

Meanwhile, production or industry gross value added figures are likely to show that the recovery through the non-mining economy lost some momentum.The NAB business survey showed weaker business conditions for retail trade, as well as wholesale trade, transportation and manufacturing activity, while construction activity was mixed. Household and business services however remained elevated despite easing moderately, which should be emulated again in the national accounts. Mining production is likely to have been moderately positive in line with higher exports in the quarter. By state, it will be interesting to see if the slowdown in business conditions and ABS employment data in NSW is reflected in softening domestic demand.

Our forecasts are well below those published in the RBA’s latest Statement on Monetary Policy which suggested real GDP growth of approximately 2¾ to 3%. This may elevate the RBA’s concerns about the non-mining economy, particularly given uncertainty about the labour market at present. At this stage, we remain comfortable with our call for two further rate cuts in mid-2017, and flag the possibility of an earlier cut if current data on non-mining activity and employment fails to pick up. Inflation and wages figures in next week’s national accounts data will also be watched closely , and are likely to remain subdued.

For further details, please see the attached document: