So now we know – the three months to the end of September saw the economy shrink 0.5%, the biggest contraction since the December quarter of 2008 when the GFC was erupting over the global economy and the economy contracted by 0.7%. The last contraction was in the March quarter of 2011 when the economy shrank 0.2% (originally reported as a fall of 1.2%).
The fall of 0.5% in the three months to September compared with the revised (higher) quarter-on-quarter growth of 0.6% in the three months to June (0.5% originally), making the extent of the latest slowdown even greater.
The outcome, significantly worse than market forecasts, means economic growth through the year to September was just 1.8% seasonally adjusted, against a revised (down from 3.3%) annual rate of 3.1% in the June quarter.
But it is nothing to get excited about (though you wouldn’t have thought that from the news coverage yesterday and this morning). many economists reckon growth will bounce back strongly in the current quarter, though we won’t learn that until early next March.
The bigger-than-expected contraction had some analysts and others talking about another rate cut in 2017 instead of figuring on no more reductions by the Reserve Bank.
But the chances of a cut are remote at this stage — the RBA anticipated the weaker growth in Tuesday’s final meeting statement for 2016 with RBA governor Phil Lowe, saying “some slowing in the year-ended growth rate is likely, before it picks up again.”
The National Australia Bank (which was one of the first to pick the negative performance, but not the size which no one picked) said yesterday:
"While the slowdown was relatively broad-based, our assessment is that the headline figure is probably overstating magnitude of the decline in the economy. Indeed, we do not anticipate another negative print in the December quarter – our early forecast is approximately 0.9% quarter on quarter, as a few one offs (such as weather disruptions affecting dwelling and non-dwelling construction, and the unwinding of strong public investment in Q2), although year-ended growth still only picks up to 2% year on year, the NAB said in a note yesterday.
"That said, softness in key categories such as household consumption and non-mining business investment, as well as in Victoria and NSW are troubling…in conjunction with slowing employment and weaker business conditions, raise the possibility that the non-mining recovery has run out of steam earlier than expected. We remain comfortable with our view that the RBA will need to cut rates further in 2017,” the NAB said.
And the AMP’s Dr Shane Oliver had a similar view in his commentary yesterday:
“While the GDP contraction in the September quarter will no doubt invite talk of a recession (defined as two consecutive quarters of falling GDP) growth is likely to bounce back in the December quarter avoiding a recession so there is no reason to get too gloomy,” he said in his note.
Like the NAB, Dr Oliver saw a series of one off impacting the figures. "A lot of the factors which drove the weak third quarter outcome will not repeat in the fourth quarter GDP numbers. Weak September quarter GDP partly looks like payback for stronger than expected GDP growth over the year to the June quarter of 3.1%.”
“Looking forward, there is going to be a further ramp up in resource export volumes, non-residential building approvals are lifting considerably, mining investment is getting closer to a bottom, retail sales growth trends have picked up again, there is still a lot more dwelling construction in the pipeline, state government budgets indicate a lift in public investment and the rebound in commodity prices with the terms of trade up 4.5% in the September quarter tells us that the income recession in Australia is over.
"So we expect GDP growth to lift back to around a 2.5% pace in the current quarter and through 2017.
"But despite our expectation that recession will be avoided and that growth will bounce back, growth is still likely to be fragile and constrained. In an ideal world now would be a time for some fiscal stimulus focussed on infrastructure spending. But with public debt well up from pre GFC levels and the Government focussed on reducing the budget deficit and the (increasingly difficult) task of maintaining Australia’s AAA credit rating this looks unlikely.”
"As such the pressure is likely to remain on the RBA. With the RBA likely to reduce its circa 3% growth forecasts and further delay the expected return of inflation to its 2-3% target in its February Monetary Statement we remain of the view that it will cut rates again next year. The need to offset increases in bank mortgage rates that are being driven up by the rise in global bond yields and the desire to push the $A lower are additional reasons to expect further RBA monetary easing,“ Dr Oliver wrote. There were some significant positives: the terms of trade rose 4.5% after a 2.1% rise in the June quarter – the first time the terms of rtade have risen in successsive quarters since te boom in 2011. Real net national disposable income (remember the income recession?) rose 0.8% in the September quarter 2016, up from a 0.5% rise in June quarter 2016.
This continued growth is largely due to the terms of trade increase. Compensation of employees rose by 1.3% this quarter, driven by the private sector, making for a solid 3.1% in the year to September. Total hours worked were up 0.5% on June while the total number of employees increased 0.4%.
Average compensation per employee was up by by 0.8%, suggesting the rise in compensation of employees was driven by more hiring and increased hours worked rather than wage increases.
Household final consumption expenditure grew by 0.4% for the quarter, thanks mostly to the continuing boom in food and coffee with a 2.2% rise in spending across hotels, cafes and restaurants. That spending helped no end.
Now for the annual Christmas spendathon. The sold October retail sales data (a rise of 0.5%) has analysts looking for a solid contribution to growth from the household sector in the 4th quarter.
