Australia: Q1 GDP growth is grinding lower - ANZ

Felicity Emmett, Senior Economist at ANZ, points out that Australian GDP rose a very modest 0.3% q/q in Q4, bringing annual growth down to an anaemic 1.7% but some of the weakness in Q1 is likely to prove temporary, although a bounce in Q2 looks unlikely at this stage.

Key Quotes

“More broadly, there looks to have been a sustained step-down in the pace of consumer spending growth as households adjust to the new world order of very low wage growth. On that front, wages growth actually picked up in the quarter, but growth in unit labour costs remains negligible, which suggests that inflation is likely to stay low. On the whole, this confirms our view that the RBA is on hold for some time.”

“The report suggests that despite the strength in business conditions, the economy lost some momentum over recent months. Some of the weakness is likely to be weather related although we do not expect a rebound in Q2 at this stage. In terms of the new information in this report, consumer spending grew 0.5% q/q and is up just 2.3% over the past year. This is a little stronger than the retail sales data suggested with stronger spending on services (eg utilities spending up 2.9% q/q reflecting the hot summer seen across the east coast of Australia). Elsewhere the data were broadly in line with the earlier partial data: housing was weak as flagged by the Construction Work Done Survey, net exports took 0.7ppts off growth, and government investment fell. Business investment was solid, with non-mining investment up 1.0% q/q and 7.6% y/y on our calculations. Stocks contributed 0.4ppts.”

“Will we see a bounce in Q2? It seems unlikely at this stage. Housing may recover from the Q1 weather related weakness, but Cyclone Debbie has hit coal exports, inventories are likely to unwind and profits will be hit by the fall in commodity prices. Moreover, there looks to have been a sustained step down in the pace of consumer spending growth that looks set to continue for some time. The household saving rate declined to 4.7% from 5.1% in Q4. This is the lowest post-crisis saving rate recorded, highlighting that with wage growth set to remain low, consumers will remain under pressure to moderate spending growth.”

“The inflation indicators in the report continue to show weakness. The household consumption deflator rose just 0.3% q/q with the annual rate rising to 1.3%, which while still very weak is up from the lows of 1.0% y/y recorded mid last year. The GDP measure of wages rose a solid 0.9% q/q although this follows a fall of 1.2%. Unit labour costs are up 0.6% q/q in the quarter, but only 0.1% higher than a year ago.”

“In terms of the outlook for policy, in Tuesdays post-meeting statement the RBA downplayed the likely soft result for GDP, characterising the weakness as “reflecting the quarter-to-quarter variation in the growth figures”. We think this is likely to prove to be too optimistic. Annual growth at an eight year low, with little prospect of any improvement in Q2, suggests that the economy is not running strongly enough to eat into spare capacity. This will clearly have implications for the trajectory of the unemployment rate and hence the outlook for wages. While the worst may be over on the inflation front, the persistent weakness in unit labour costs points to an ongoing absence of domestic costs pressures. In our view, this will leave the RBA on hold for the foreseeable future.”