- Economic growth remained disappointing in the September quarter;
- Consumers are not spending, business investment is weak;
- Exports and government spending have been the pluses;
- Stronger disposable income and productivity growth is required.
Investors receive a lot of economic information. Business and consumer sentiment surveys, job reports, import figures all tell part of the economic story. But there is only piece of data that contains the economic narrative chapter and verse: the GDP figures. The GDP data not only tells us how the economy has performed but also helps tell us how it may perform in the future.
The September quarter GDP numbers confirmed the economy is running at around a sub-par 2% pace. This is comfortably under the ‘potential’ (average) growth rate of the economy. And well under the 3%-plus pace that Australia needs to get the unemployment rate down and the inflation rate up. For living standards a more important indicator is GDP per capita growth. That measure rose a low 0.2% over the year to September.
The composition of growth was also disappointing. Domestic demand growth has been low. Consumers aren’t splurging despite the tax cuts. Outside of mining, firms are keeping a tight rein on capex budgets. Both consumers and firms are worried about the economic outlook.
There are bright spots. Mining exports are up as result of decent prices for iron ore and big volumes of LNG. The weaker exchange rate is attracting overseas students and tourists. There has been big jumps in spending on the NDIS and infrastructure. Government spending in coming quarters will remain at a high level although the best part of the growth in spending might be in the rear-view mirror.
Performance by industry
As would be expected in a middling economy, activity is patchy between sectors. Mining is a standout, helped by strong infrastructure spending in China. With surveys indicating a pickup of capex spending ahead mining activity should remain strong for a while yet. For many years the finance sector was helped by strong credit growth. More recently it has been superannuation (and the pickup of the stock market). The health (and welfare) sector is typically strong, currently also helped by big licks of NDIS spending. The strong demand for IT workers as firms digitise is boosting the professional sector.
Retail trade is one of the industries doing it toughest. The drought is making things tough for farmers (and firms that service the agricultural sector). High electricity prices has led to lower electricity demand. The downturn of the residential property market hit the real estate sector.
Industry sector growth
Small sector/strong growth
Big sector/strong growth
Small Sector/weak growth
Big sector/weak growth
Small/large sector means less/above than average sector weighting in total economy (4.5%)
Weak/strong growth means sector has had weaker/stronger than average growth over the three years to September 2019 (2.3%)
Lack of consumption
So the economic performance over the past year has been mixed. And the concern is that it might remain mixed. One reason that particularly worries the RBA has been the subdued consumer. Partly that might reflect a rise in consumer risk aversion as households become more worried about the possibility of unemployment.
But the bigger issue has been the sustained weak growth of disposable incomes. Modest wages growth has been the main cause (partly offset by strong jobs growth). Income taxes have been taking a rising chunk out of consumer incomes (and helping to push the Budget into surplus). So the tax cuts have been welcome. In aggregate consumers are also benefitting from very low interest rates. Clearly though borrowers are doing a lot better from lower rates than savers.
But households are using their extra disposable income to pay down debt and boost savings. The household saving ratio jumped over two percentage points in the September quarter, and is now at its highest level since the beginning of 2017. More saving means that households are squirrelling away a few more nuts if bad economic times hit. And a stronger balance sheet provides the basis for households to spending more in the future. But it also means that consumers are not boosting the economy now.
Lack of productivity
At least as concerning is the low rate of productivity growth (the amount produced per hour worked). Productivity growth matters because it drives living standards over the long-run. The ABS data suggests that economy-wide productivity growth is currently at its slowest pace since after the 1990s recession.
Partly the slow productivity growth reflects good news as jobs growth has been strong despite the weaker economy of recent years. More concerning is that the sluggish pace of business investment growth over recent years will keep a lid on future productivity growth. And recent surveys indicates that firms across most sectors are revising down their capex plans.
But the likely pickup in mining investment should at least keep productivity growth humming along in that sector. A turn in the construction cycle will help. As will the end of the drought. And all sectors are getting on the digitisation bus, increasing software investment and therefore boosting demand for the IT sector.
Overall the GDP numbers confirmed that economic growth has been too weak. And this was the reason the RBA had to cut rates three times this year. The GDP numbers certainly did nothing to change investors’ views about the need for at least one more rate cut next year. And maybe that will be enough to get growth going at the pace required. But disposable income and productivity growth will both need to be stronger for the economy to sustainably power ahead in the future.
We live in interesting times!
Peter Munckton - Chief Economist