Australian Q3 GDP: Activity a touch softer than expected, household spending very weak – ANZ

David Plank, Head of Australian Economics at ANZ, notes that Australian GDP rose 0.6% q/q in Q3, a touch below their and market expectations of 0.7% q/q.

Key Quotes

“Annual growth accelerated to 2.8% as last year’s negative figure dropped out. Household consumption growth was very soft, with the 0.1% q/q gain the weakest since 2008. On a more encouraging note, compensation of employees was up 1.2% q/q to be up 3% y/y. The strength of income meant the household saving rate ticked up in the quarter. The result highlights the disparate influences on the economy at present, with household spending under pressure but investment strong. We are encouraged by the rise in wages, but it needs to be backed up by the Wage Price Index to impact on RBA policy expectations for 2018.” 

“GDP was up a modest 0.6% q/q in Q3, a slowing from the upwardly revised 0.9% q/q result for Q2. Despite this, annual growth accelerated to 2.8% as last year’s negative quarterly result dropped out of the figures.  This is the fastest annual growth since the year to June 2016 and is around what we consider to be trend. The result was a touch below our own and market forecasts but essentially in line with the forecast published in the RBA’s November Statement on Monetary Policy.” 

“Non-dwelling investment was the biggest contributor to growth, with both public and private sector rising. Underlying business investment was up 2% q/q and has risen for four quarters in a row. Government investment, ex-transfers, was up 5% q/q, highlighting the strength of infrastructure spending. Household consumption was soft, rising just 0.1% q/q. This is the weakest quarterly outcome for household consumption since the final quarter of 2008. Dwelling investment fell 1% q/q and has now declined for three quarters in a row. Overall, domestic final demand was up 0.6% q/q, the softest result since the September 2016 quarter. Inventories added 0.2 ppt to the result, while net exports were flat.”  

“On the income side of the accounts, the numbers were solid, with the wages bill growing 1.2% q/q; private non-financial profits also rose 1.2% q/q. Nominal GDP rose 0.6%, a lift from the June quarter result, to be up 5.9% y/y.” 

“The inflation indicators in the report were somewhat mixed, though still generally subdued. The GDP measure of wages rose 0.5% q/q, a pick-up from the gain of 0.2% q/q in Q2. Unit labour costs rose 0.6% q/q in the quarter (on a hours basis) but are up just 0.5% over the past year – a slowdown from the revised 1.4% y/y gain in Q2. The household consumption deflator was flat in the quarter, with the annual rate slowing to 1.1%. While still very weak, this is up from the lows of 0.7% y/y recorded in the year to December 2016.” 

“For policymakers, there might be some encouragement with the lift in income and the somewhat higher household savings rate. This highlights that the economy can grow around trend even if the household sector is contributing little so long as investment side remains strong. And the forward indicators suggest investment will remain solid. But growth is still patchy, with household consumption particular weak. We think further confirmation will be needed that the tighter labour market is translating into higher wages before the RBA will be confident enough to lift the cash rate from its record low.”