Economic growth in the third quarter wasn’t quite as solid as I thought it would be after the run of encouraging data in the past week, and the 0.6% quarter on quarter rise and 2.3% rise in the year to September continues the meandering sub trend performance of the past year.
Compared to the likes of the US, Japan, the UK and parts of Europe, our economy is tolerating sluggish group, well under the long term trend level of 3.2%.
Second quarter growth, originally estimated at 0.6%, was raised to 0.7% and the year-on-year growth rate for the second-quarter was also revised down to 2.4% from 2.6%.
Economists had forecasts growth of 0.7% before the release of the data yesterday, and 2.6% for the annual rate.
The growth data helped the market rebound yesterday afternoon as investors reckoned the slow pace of expansion would see the Reserve Bank maintain rates at their current level for longer.
The Aussie dollar slipped and briefly went below 90 US cents in US trading during the night. It rose back to around 90.15 US cents.
The local market is looking for a weak opening this morning after a lacklustre performance on Wall Street, a sharp rise in the US oil price and a 2% recovery in the gold price.
Growth in the third-quarter was driven by the mining industry, which added 0.3% to GDP, while the construction, transport, postal and warehousing, financial, public administration and healthcare industries also contributed 0.1% each to growth.
But economists, while surprised at the lower outcome, still expressed confidence that the economy would be growing closer to trend in a year’s time.
Funnily enough news of the weaker growth figures helped the stockmarket reverse an early fall and saw the dollar lose more than half a US cent to fall back to around 90.60c which is a three month low.
The feeling is that the weak growth data will prompt another Reserve Bank rate cut, but that is not on the cards at the moment.
Growth still bumping along under the economy’s potential as consumers save more
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The AMP’s Dr Shane Oliver wrote yesterday afternoon that, "The combination of a housing recovery, gradually improving confidence and a pick-up in non-mining investment point to growth picking to up 3% through 2014.
"This should help underpin stronger profits for the Australian share market, which in turn should support further share market gains, albeit at a more constrained pace than over the last year with a bit more volatility."
And Bank of America/Merrill Lynch’s Saul Eslake wrote that, "The transition from growth led by resources investment to growth led by a combination of resources, exports and other components of domestic demand is going fairly slowly.
"While we are seeing big increases in house prices, and we’ve seen some increase in building approvals too for units in Sydney, overall, dwelling construction is pretty soft.
"The higher house prices are not evidently boosting private consumption expenditure in part because households are choosing not to monetise the increase in the value of their dwellings by borrowing against them. So household spending growth is being constrained in line with what is relatively weak growth in disposable income."
That was confirmed by the rise in the savings ratio to 11.1% from 10.2% in the June quarter (the trend rate in the September quarter was a still very solid 10.7%). So while disposable income is weak, Australians are saving more.
Household spending rose 0.4% in the September quarter, taking the annual growth rate to 1.8% for the year – far less than the actual trend level of 3.5%.
But despite that, retail sales have had six or seven months of gradually strengthening activity.
That means Australians are cutting back elsewhere because they do not appear to be dipping into savings or into the equity in their houses and units.
Remember that the GDP data is backward looking, and that there are signs from early figures for October and November, that some parts of the domestic economy are strengthening – retailing (up 3.4% in the year to October), car sales rose in November by 4.5% (or 1.5% seasonally adjusted) according to industry figures, and will easily top 1.1 million units for yet another year. Sales were down 1.4% on November last year.
House prices are still growing, but at a slower pace in some key markets such as Melbourne, but not Sydney and Perth. Building approvals remain solid.
The November jobs data a week today will be the big test here for economic confidence.
The US data for November is released tomorrow night, our time, and is the big test for the US and other markets insofar as the Fed’s stimulatory spending is concerned.
