The dollar fell, then recovered a little, the stockmarket powered on in its second day of gains and news that the Australian economy grew at a sluggish 0.3% in the September quarter seasonally adjusted, seemed to excite the media and the politicians more than anyone else yesterday.
Even though it is clear we face another year of indifferent growth, a realisation which triggered the start of the now usual round of rate cut calls for 2015.
The GDP report, from Australian Bureau of Statistics showed growth well down on market forecasts of 0.7%, quarter on quarter and 3.1%, annual, against the 2.7% rise reported.
There’s no need for panic – the dollar fell under 84 US cents for a short while to a new four year low, raising hopes it’s starting another slide to around the 80 US cent mark, just as the Reserve Bank hopes, along with large sections of business, but not importers, online shoppers offshore, or travellers.
The dollar was back over 84 US cents in Asian trading this morning, but it seems to be dipping lower.
Annual growth of 2.7% remains within the range of thinking at the Reserve Bank and Treasury, neither of which expect a return to trend growth of around 3% or a little more until late next year.
In May, Treasury forecast 2.75% for the whole of 2013-14 and 2.5% growth in 2014-15, and last month the RBA ticked 2.5% for calendar 2014 and 2-3% for 2014-15.
Q3 GDP disappoints
.png)
But the economy will now need a boost in the current quarter and going into next year if those forecasts are to be met. Mining’s contribution to growth – unlike in June – was positive, but very weak, and below that of financial services, while construction dragged the economy lower, as did private and public investment and business inventories.
Labour productivity continued to rise, but growth is the weakest in 15 months. Indeed, the economy is now travelling at about the same speed as mid 2013, when growth slowed to 0.4% for the September quarter and an revised 1.9% annual. That is bad news for the Treasurer ahead of the forthcoming Mid-Year Economic and Fiscal Outlook on December 15.
That will give us Treasury’s updated growth forecasts for this year and next, but without a boost to growth the current and 2015 budgets are now under pressure not just from falling commodity prices (terms of trade fell 3.5% seasonally adjusted in the September quarter, and 8.9% for the 12 months) but from a weaker domestic economy and, weak employment and wages growth which is cutting personal tax collections.
Growth at the September quarter’s rate, if it continues, won’t be enough to soak up a growing workforce. 2014’s school leavers and Tafe and university graduates in this year are going to have a miserable time finding a job, let alone a good one, in 2015.
GDP topped the $400 billion mark in the quarter for the first time – small positive statistical note – $400.6 billion to be exact, up from $398.1 billion in the June quarter and $390.1 billion in the September quarter of 2013.
Growth was below trend because, as the Reserve Bank has been warning, the economy is making the transition from the mining investment boom which is slowing faster than the economy can find growth from other sources, such as housing, exports and household consumption.
Remember the RBA says the economy will grow below trend for several more quarters – really until possibly this time next year.
The rest of the economy couldn’t find enough traction and boost growth to offset the impact of a 0.7 of a percentage point fall in Gross Capital Formation (thanks to falls in private and government investment), while inventories contracted 0.1 of a point when the business indicators showed a rise in the quarter of 0.7%, against a 0.9% rise in the June quarter which produced a positive contribution to growth of 0.8 of a point. Net exports contributed 0.8 of a point to growth after detracting by 0.9 of a point in the June quarter, and that big boost in the first quarter.
The terms of trade fell 3.5% in the quarter, against a fall of 4.1% in the June quarter, but the annual rate worsened to a drop of nearly 9% against 7.9% in the June quarter.
The savings rate edged down to 9.3% from 9.5%, while a year ago it was 10.1%, so Australians are running down their savings to buy houses and consumers as real wages growth slows and national income drops away. Real net disposable income contracted by 0.3%, faster than the 0.2% fall seen in the June quarter. Annual growth slowed 0.8% from 1.0% and will dip lower in coming quarters as the sluggish growth in wages and the weakening terms of trade produce more falls in national income.
That will be the natural consequences of the steeper fall in iron ore prices since June 30, along with the rapid decline in oil prices, and the slower fall in the prices of thermal and coking coal.
The fall in the dollar hasn’t been anywhere enough to offset the drop in commodity prices (which will be down for the fourth year in a row, according to Bloomberg). Should the falls in commodity prices steady in the next six months, then the benefit of the lower dollar can start having a positive (but very slow) impact on incomes, but that won’t really be noticed until well into the 2015-16 financial year.
The AMP’s Chief economist, Dr Shane Oliver said There were some positives from the GDP report.
“In particular, productivity growth is running around 2% pa, which is well up from several years ago, the household savings rate remains high at 9.3% indicating that households have a reasonable buffer that they can draw on and growth in export volumes is strong as resource investment projects are completing.
“And the two speed economy is really going into reverse with real final demand up +1.3% quarter on quarter (qoq) +4.7% yyear on year (yoy) in NSW but down -2% qoq or -4.8% yoy in Western Australia.
"There is also a danger in dwelling two much on the slump in real gross domestic income flowing from the falling terms of trade. While we have now had two quarters of decline on this measure resulting in an “income recession”, it’s not actually a new phenomenon as we also had income recessions in 2011-12 and through the GFC.
“More importantly, while swings in the mining and energy export prices are very important for resource companies and hence for government revenues their impact on the rest of the economy is far more modest.
"For example, real gross domestic income surged through 2010-11 suggesting a booming national economy but at the time the “two speed economy” was at its worst with sectors like home building, retailing, tourism and manufacturing really struggling. Now these sectors are starting to come back to life to varying degrees.
“The September quarter national accounts are actually consistent with the RBA’s forecast for GDP growth to slow to 2.5% for the year to the December quarter this year, and we continue to see growth picking up to around 3% next year as the rebalancing of the economy continues.
“However, with the terms of trade falling sharply the risks are skewed to the downside and so if more assistance to the economy is not delivered by a further fall in the value of the Australian dollar in the months ahead,” he wrote yesterday.
