Headline GDP growth posted a modest result in Q2 and has slowed considerably since mid 2018. Output rose 0.5% q/q% to be 1.4% higher over the year. The dynamic of a weak private sector, offset by strength in public spending and trade continues to play out. Overall below-trend growth however makes it likely employment growth will slow and the unemployment rate will edge higher rather than fall as the RBA projects. The unemployment rate is already well above the RBA’s 4.5% estimate of the NAIRU, keeping inflation below the RBA’s 2-3% target range. Weak growth, higher unemployment and low inflation point to further rate cuts. The risk of further deterioration in the labour market adds to the possibility that the RBA cuts sooner than NAB’s forecast of a November move, particularly given a more uncertain global backdrop. However, it seems that the RBA may again downplay weak growth given the data pre-date both the June/July rate cuts and income tax cuts, even though retail sales failed to show an initial boost from the tax refunds in July. That said, this weak outcome will again see the RBA mark down the starting point for its forecasts for growth at the November Statement on Monetary Policy, such that it will take longer to reduce unemployment with a slower return to target inflation. This ongoing challenge underscores the need for further monetary easing, with a move to some form of unconventional policy on the cards next year, particularly with the government seemingly reluctant to abandon its surplus objective to provide fiscal support.

In Q2, household sector weakness was again driven by a sharp fall in dwelling construction, while consumption growth remained weak. In addition, private business investment declined further. Public consumption and trade made solid contributions which were able to offset this weakness. Again, both the income and production measures of GDP were stronger than the expenditure measure. GDP (P) was supported largely by mining and the services sector. On the income side, growth in compensation of employees (both from an increase in employment and average compensation) and company profits – again largely supported by mining and sky-high iron ore prices – led the gains.

Find out more in the NAB Q2 2019 GDP Report