Growth, inflation and labour market all easing
Household weakness persists.
The national accounts recorded a 3rd successive print of below trend GDP growth. Output rose 0.4% q/q% to be 1.8% higher over the year. While growth was slightly stronger in quarterly terms, this outcome confirms the softening in growth over H2 2018 has persisted into 2019. Continued subdued economic activity will be a headwind to growth in labour demand, which is needed to prevent a rise in the unemployment rate. With ongoing spare capacity in the labour market and economy more broadly it is likely that domestic inflation pressures will remain weak. Today’s release will have little impact on the near-term path for monetary policy, with the RBA remaining focused on developments in the labour market (and will not cause a large revision to its current set of forecasts). That said, the data suggests some risk of a further easing in the cash rate to below 1.0% should growth remain weak and the private sector continue to lag. We still expect a further easing in the cash rate to 1.0% in August with the risk of further easing later in the year should downside risks eventuate.
In the quarter, the softness was driven by a 2.5% fall in dwelling investment and a further slowing in consumption growth. Offsetting the weakness in the household sector was another solid contribution from public demand and a rebound in net exports. Both the income and production measures of GDP were stronger than the expenditure measure, reversing some of the weakness over the past year. GDP (P) was supported largely by the services sectors, with construction showing some weakness alongside the downturn in housing and further completions of mining projects. On the income side, growth in compensation of employees provided support in the quarter (due to strong employment growth), as did corporate income (driven by strong profits in the mining sector).
Looking forward, we expect year-average growth of 1.7% in 2019, before rising to 2¼% in each of the next two years – around ¼ to ½% below potential. We expect the downturn in the housing construction cycle to continue, with dwelling investment falling by around 20% from peak-to-trough, and household consumption to grow only modestly. Offsetting the household weakness, we see further support from exports in the near-term, and ongoing strength in public sector spending over the next two years. We also expect a sizeable contribution from private business investment. Overall, with below trend growth we see a slight deterioration in the labour market and ongoing spare capacity in the economy. This will result in a very gradual return to the inflation target – even with another rate cut factored in. Therefore, should weak GDP growth persist or a more significant global downturn eventuate, we see the risk of further rate cuts and the potential for additional stimulus measures (fiscal or otherwise).
For further details, please see the Q1 2019 GDP Report
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.