QTPA Member Alert |Australian Industry Group Economic Developments 5/12/14

Australian Industry Group Economic Developments 5/12/14

GDP in Q3 indicates serious weakness in the Australian economy

A large volume of Australian economic data was released this week. The latest GDP estimates (the National Accounts) were the most significant – and startling – of these releases. The GDP data for Q3 and the revisions to Q2 suggest the Australian economy is considerably weaker than many commentators and policy-makers have been willing to acknowledge. Real GDP growth is now tracking at well under 3.0% p.a., reflecting the subdued local economic conditions that have been evident in Ai Group’s Australian PMI®, PSI® and PCI® for much of 2014. In the three months to the end of September, domestic final demand (that is, GDP net of exports) fell by 0.3% q/q to be only 0.9% higher over the year. Nominal GDP fell for a second quarter in Q3 2014, due to further large declines in the terms of trade combined with low inflation plus domestic economic weakness, while non-financial corporate profits, business investment and even housing investment also declined. National incomes are falling in aggregate and on a per capita basis.

More positively this week, in response to the latest GDP data, the Australian dollar fell below 84 US cents, its lowest level since mid-2010. If it is sustained, this should provide some support to exporters and trade-exposed industries locally. Nevertheless, the RBA noted that even at this level, “the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months”. A lower dollar over a longer period would help balance growth across the economy.

The latest ABS National Accounts for the September quarter (Q3) 2014 showed that real GDP increased by just 0.3% q/q and 2.7% p.a. in Q3 2014, well below the long-term trend growth rate of around 3.25% p.a. (inflation adjusted and seasonally adjusted) and well below market economists’ forecasts, which expected 0.7% q/q. GDP growth in Q2 was also revised down to 2.7% p.a., from the 3.1% p.a. estimated previously.

This weak quarterly growth was derived mainly from net exports (and mainly from mining exports), which contributed to 0.8 percentage points worth of growth in Q3. Abstracting from this strong export activity, growth in domestic final demand (that is, GDP net of exports, or total consumption plus total investment) declined by 0.3% q/q in Q3, to be just 0.9% higher than a year ago (inflation adjusted and seasonally adjusted). This indicates far weaker local economic growth than is suggested by the headline GDP results.

In contrast to the strong growth in net exports and a modest increase in household consumption, total capital investment across the economy fell by 2.7% q/q and 2.8% p.a. in Q3 (see Chart 1 and Table 1). Within the private sector investment category:

• Private new engineering construction dropped for a fourth consecutive quarter, by 5.8% q/q (-16.3% p.a. and 18.8% below peak in December 2012), reflecting the rapid and sharp decline in mining-related investment. Separate ABS data released this week showed the value of minerals exploration dropped by 7.8% q/q in Q3 to be 28.5% lower than a year ago and 57.7% below its peak value of $1.04 billion in Q1 2012. This decline is most obvious in WA.

• Private sector investment in dwellings (that is, new dwellings plus alterations and additions) dropped by 0.9% q/q, although it was still 6.8% higher over the year. This followed three quarters of solid growth in dwelling investment reflecting the recent pick-up in the residential construction industry. The Q3 dwelling investment result could be short-lived, but it nevertheless indicated the fragile nature of a residential construction led economic recovery.

• Investment in non-dwelling construction (that is, in retail, commercial and industrial buildings) strengthened for a third quarter, albeit by a slower pace, up 0.9% q/q (+6.9% p.a.).

• Investment in machinery and equipment rose by 7.0% q/q although it was still 0.4% lower over the past year.

• Construction industry output fell by 2.5% q/q in Q3 2014 to be only 2.2% p.a. higher. This was the first quarterly decline for construction since Q1 2013. It reflected weaker dwelling investment in Q3 2014 and ongoing falls in mining-related engineering construction. Output from rental & real estate services, which is closely aligned with the property market, fell by 1.5% q/q although it was still 9.0% higher than a year ago.

• Adding to the fall in total investment, public sector investment fell for a third quarter in Q3, down 4.5% q/q (-3.6% p.a.).