Growth, inflation and labour market all easing
A moderate outcome pre COVID-19.
Headline GDP rose by 0.5% in Q4 to be 2.2% higher over the year, a moderate result ahead of an expected virus-driven fall in output in Q1. Notwithstanding a significant contribution from the recovery in housing turnover and small improvement in consumer spending, private domestic demand remains weak with falling residential construction and business investment subtracting 0.3ppt from growth. Net exports and stocks helped offset this weakness. While the focus of policy-makers has turned to the impact of the coronavirus on both the global and domestic economies, today’s outcome confirms a below trend pace of growth as a starting point even with the strong recovery in housing turnover, with a turnaround unlikely for some time given residential investment has yet to trough, consumer spending is constrained by weak wage growth and businesses outside of mining remain reluctant to invest. Factoring in an initial hit from the virus outbreak, this leads us to forecast growth to remain below trend over the next year or so, before seeing a small improvement. There is significant uncertainty about the extent and duration of the shock from the outbreak, but this outlook points to rising unemployment over 2020 and likely further action from the RBA beyond our expected rate cut in April. We will update our forecasts for growth, the labour market and the policy outlook next week.
In Q4, weak private demand growth was driven by a fall in dwelling investment which is now down 9.7% over the year, and a decline business investment. While consumption growth improved, it also continues to track well below its long-run average, reinforcing our long-held view that tax rebates have failed to provide a significant boost to household spending. Indeed, part of the increase in consumption reflects extreme price discounting. Public-sector spending made no contribution following the solid outcome in Q3. Offsetting some of this weakness was a 0.1 contribution from exports – though this is a little weaker than recent quarters. A significant (though likely) temporary boost to the expenditure side came from the recovery in housing turnover which saw a boost to real estate margins. Both the production and income measures of GDP were slightly stronger than the expenditure measure in the quarter.
Looking forward, the magnitude of the bushfires and especially the coronavirus impact on the March quarter will be a focus, as will the ongoing impacts of the latter in subsequent quarters. For now, we have factored in a decline in March quarter GDP, but for a small recovery in quarterly growth thereafter on the assumption that the virus is quickly contained. As a result, we see year-average growth of 1.2% in 2020 before an improvement in 2021 to around 2.7%. Should the impact of the virus become more protracted this will necessarily see a down grade to our forecasts for growth. Notwithstanding the impact of the virus, our read is that the sluggish pace of underlying growth already warrants further policy action, with below-trend growth over the next 18 months likely to see a deterioration in the labour market with further downside risk as a result of ongoing impacts from the coronavirus. Indeed, we see the RBA cutting rates for a second time in 2020 at the April meeting and a significant risk of unconventional policy going forward depending on the severity of the uptick in the unemployment rate as well as the magnitude and impact of any response from fiscal policy.
Find out more in the NAB GDP Q4 2019.
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