March 7, 2018
Australian Economic Update: Q4 GDP 2017
Australia recorded subdued economic growth in Q4, with the detail painting a mixed picture.
Bottom line: Australia recorded subdued economic growth in Q4, with the detail painting a mixed picture. On the upside, net exports should bounce back and the decline in business investment is not as troubling as it initially appears. Household consumption was particularly strong, although we question whether this pace can be sustained. Measures of wages were again weak, despite strong employment, as was labour productivity, both elements of the growth outlook which we would like to see improve. The data don’t change our view that economic growth will pick up to around 3% by end-18 on the back of LNG exports, business and government investment. While this is good news, there is little to imply a sustained pickup in consumer spending and inflation – the RBA will remain on the sidelines for now.
- Australian GDP growth disappointed in the final quarter of 2017, easing to 0.4% q/q in real terms (Mkt: 0.5% q/q and NAB: 0.7% q/q). This saw the year-ended rate of growth dip down to 2.4% y/y.
- The most encouraging aspect of the data was a rebound in household consumption (+1.0% q/q), despite a small rise in the household savings ratio to 2.7% (from 2.5%). That said, while labour income was strong thanks to strong employment growth, the national accounts measure of average earnings was flat – this will continue to limit consumer spending through 2018, particularly given a less supportive wealth effect as housing prices cool.
- Meanwhile, the decline in business investment is not quite as disappointing as it first appears. In underlying terms (excluding transfers) business investment was down 1%, largely driven by a fall in engineering construction, which was concentrated in the NT and likely reflects the lumpy profile of LNG investment projects. Meanwhile, non-residential building was up 3.3% and machinery & equipment investment increased by 3% in underlying terms, the fourth consecutive increase. Government investment declined in the quarter in underlying terms, but remains higher over the year and will remain a key source of growth going forward. The small decline in dwelling investment meanwhile was unsurprising, having peaked in late 2016.
- Net exports subtracted a large 0.5ppt from growth, driven in large part by lower rural, coal and services exports, as well as stronger imports which was broadly consistent with decent domestic demand growth. Net exports should turn around in coming quarters as LNG exports ramp up.
- The state and industry detail was a little varied, but mostly consistent with a broadening recovery (see below).
- The RBA will likely look through some of the volatility and one-offs in these figures and retain a (somewhat) optimistic outlook for the Australian economy. However there was little to alleviate concerns about household spending and incomes, or suggest a sustained uplift in wages and inflation. Expect the RBA to remain on the sidelines until late this year.
- On the expenditure side, household consumption added strongly to growth, more than offsetting the large subtraction from net exports. Business investment fell modestly, as did dwelling construction and government investment (in underlying terms), while government consumption was solid. Inventories were neutral for growth. The statistical discrepancy added 0.2ppts – indeed the expenditure (E) measure of GDP was weaker than the income (I) and production(P) measures in both quarterly and year-ended terms (see tables on page 2).
- By industry, gross value added down in 6 of the 19 groupings in the quarter, which does not gel with the broad-based strength in business conditions in the NAB business surveys. However in year-ended terms growth was positive in all industries except wholesale, other services and agriculture. Services industries outperformed in the quarter. Agriculture declined again, as did transport, utilities, manufacturing and admin services. On a year-ended basis, hospitality, health and construction were the top performers.
- By state, final demand growth improved in the ACT, NSW, QLD, SA and TAS but slowed in Vic and declined in WA and the NT. In year-ended terms, all states and the ACT reported stronger domestic final demand, although it remains weak in WA. While NT domestic demand fell, the decline in private investment was likely associated with the Icthys LNG construction and therefore temporary.
- Income measures such as real gross domestic income were broadly in line with real GDP growth in Q4 thanks to the terms of trade broadly stabilising, although declined in per capita terms and have slowed through the year. Labour income (compensation of employees) was up 1.1% q/q, although this was entirely driven by employment (hours worked), with average earnings flat at 0.0% q/q and 1.6% y/y. Growth in corporate profits (GOS) eased a touch to +0.6% q/q and 4.1% y/y. Labour productivity declined in the quarter, with hours worked outpacing economic growth.
For more details, please see the attached document: