Australia: Contraction in Q3 GDP raises questions about non-mining recovery - NAB

Research Team at NAB, suggests that today’s National Accounts saw real GDP growth come in well below market expectations at -0.5 % q/q, with year-ended growth dropping to just 1.8% – below Australian growth potential.

Key Quotes

“This is the first contraction in GDP since Q1 2011 and highlights the lingering risks to the growth outlook. Growth is forecast to remain well below 3% in the medium term.”

“While the slowdown was relatively broad-based, our assessment is that the headline figure is probably overstating magnitude of the decline in the economy. Softness in key categories such as household consumption and non-mining business investment, as well as in Victoria and NSW are troubling.”

“Today’s figures, 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 weakness in GDP growth was relatively broad based in the quarter, with investment, public spending and trade all contracting. Dwelling investment saw a surprise decline in the quarter (‑1.4%), largely related to weather disruptions, although the extremely elevated construction pipeline suggests an increase in activity going forward.”

“Household consumption was the only expenditure component to show positive, albeit fairly modest growth at 0.4% q/q.”

“The recovery in the non-mining economy has become much less pronounced, although the services sector still appears to be performing reasonably well – our estimates of non-mining GDP decreased by 0.2% in the quarter and year-ended growth eased to 2.6%.”

“The terms of trade rose by 4.5% in Q3, and added to income growth – following a prolonged period of decline. However, the sustainability of recent rallies in commodity prices remains questionable.”

“Labour productivity measures took a noticeable step backwards in the quarter, with GDP per hour worked falling by 1% q/q and market productivity down 0.9%, as aggregate hours worked rose in the quarter despite the weak GDP outcome.”

“Price indicators in the National Accounts were mixed in the quarter.  The GDP deflator – the broadest measure of inflation – rose 1.1% q/q. However measures of consumer prices were subdued overall to be consistent with the modest outcome seen in the Q3 CPI.”