The Australian economy hits an air pocket

Transcription

1 1 December 1 The Australian economy hits an air pocket Q GDP:.%qtr,.7%yr The Australian economy expanded by just.% in Q, close to expectations (mkt.%, Westpac.%). However, annual growth moderating to.7% was a downside surprise. There were downgrades to growth in Q (.% from 1.%) and Q (1.1% from 1.%). The non-farm sector disappointed, printing at.%qtr,.%yr. More favourable seasonal conditions triggered an offsetting boost in farm GDP, up 1.%qtr, 11.1%yr. Private demand growth slowed from 1.% in Q to.% in Q. This reflected trends in both consumer spending and housing construction. Compounding this, export volumes dipped after a strong Q showing. That saw net exports slice.ppt off growth in the quarter, a turnaround from a.ppt boost last period. Moreover, non-farm inventories were cut, subtracting.ppt off quarterly growth. So what are we to make of this? We suspect the national accounts are underestimating growth and anticipate, in time, upward revisions. We're inclined to believe hours worked - which was +1.%qtr, +.%yr in Q - from the labour force survey. Hours worked at.%yr and GDP at.7%yr implies an overly negative productivity performance. Tension between labour market and GDP figures have arisen in the past, with revisions to the GDP resolving the apparent dilemma. Some loss of momentum in Q is understandable. There was a dip in consumer and business confidence, with the lows hit in June and July respectively. This was at a time of domestic policy uncertainty in the count down to the Federal election on August 1. This appears to have weighed on parts of business investment spending in Q and on consumer spending in WA and Qld - the two states where confidence was most fragile. Confidence has since rebounded, to be more in line with positive fundamentals. As they stand, the national accounts suggest the slowdown in GDP growth was quite dramatic, from 1.1%qtr in Q to.%qtr in Q. We believe this exaggerates the situation and is a misleading guide to underlying trends. Consumer spending growth apparently slowed from 1.%qtr to.%qtr. However, the real retail sales figures show a less pronounced moderation (1.%qtr to.7%qtr) in response to the RBA's rapid fire six rate rises in the eight months to May. Exports dipped in Q (-.%qtr) after a strong Q (+.%qtr) but volatility in gold shipments exaggerates this profile. We expect export volumes to trend higher GDP: Sep qtr Australian economic conditions domestic demand GDP % qtr % yr Jun Sep Jun Sep Private consumption Dwelling investment Business investment* Private final demand* Public spending* Domestic demand...1. Stocks private non farm #...7. other # GNE.... Exports.... Imports Net exports # Statistical discrepancy #.... Non farm GDP GDP, real GDP, nominal GDP deflator Household deflator...1. Earnings per worker (non farm).7... Real household disp income *adjusted for asset sales, # ppt contribution to growth public demand * private demand - Sep- Sep- Sep- Sep- Sep- Sep- * smoothed - - Westpac Institutional Bank is a division of Westpac Banking Corporation ABN Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac s financial services guide can be obtained by calling 1, visiting or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR1) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number ) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our , fax or mailing list please send an to economics@westpac.com.au or fax us on +1 or write to Westpac Economics at Level, 7 Kent Street, Sydney NSW. Please state your full name, telephone/fax number and company details on all correspondence. 1 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. 1

2 1 December 1 from here. We also expect non-farm inventories to be a plus in coming quarters. The economic outlook for Australia remains positive. The terms of trade is up %yr. That's boosting incomes, both profits and wages. Consumers and business are confident again and investment intentions - particularly in the mining sector - are upbeat. This points towards an ongoing rotation to strength in the private sector as public investment becomes a headwind to growth over the year ahead as fiscal stimulus fades Australia: the domestic growth mix ppts cont' contributions to qtrly domestic demand growth Q Q1 Q Q ppts cont' Domestic demand (Andrew Hanlan) The Australian economy lost momentum in Q, the extent of which is a matter of debate Temporary tax breaks boost & subsequent reversal consumer housing business public demand Domestic demand (.%qtr,.%yr): Demand growth slowed a little, to.% in Q from.% in Q. Even so, annual growth accelerated to.% from.1%, the fastest pace since mid-. Public demand (.%qtr,.%yr): The public sector added to growth in the quarter. However, the peak boost has passed - that was back in Q and Q1, with annual public demand growth hitting 11.% in Q1. The Federal Government's stimulus building program, $1.7bn on schools and $.bn on public housing, has provided a major boost, such that total public investment is up % over the year. Public investment is around its peak (down.% in Q and up.% in Q), with falls likely in coming quarters. Public consumption (7% of total public demand) increased modestly in the quarter, up.%, after an above par rise in Q, +1.%. Private final demand (.%qtr,.%yr): Conditions in the private sector were not as buoyant as the previous quarter, with growth moderating from 1.%qtr to.%qtr. This moderation was evident in consumer spending and housing construction. Even so, annual growth in private demand strengthened to.% in Q - the best result since Q. Consumer spending (.%qtr,.%yr): Household spending advanced by.% in the quarter, following an apparent spending spree in Q (+1.%). See below for a more detailed discussion of the household sector. Housing construction ( 1.%qtr,.%yr): There was a moderation in new dwelling construction in Q, with a decline of 1.% - a far smaller fall than the 7.1% drop reported in the construction work survey. A fall of this size is more believable. Indeed, with dwelling starts up % in the year to June quarter our original expectation was for a rise. Wetter than usual weather and pipeline smoothing by builders appears to have constrained activity. Beyond some near-term upside, activity is set to moderate through 11 due to the unwinding of policy stimulus. Renovation work declined, falling by.% in Q, but the outlook is for moderate growth given the strength of household incomes. New business investment (.%qtr,.%yr): Overall business investment increased by.% in Q, lifting annual growth into the positive zone for the first time since the end of. The boost was from infrastructure work up 7.%qtr, 1.7%yr - despite a reported fall in such work in WA. There's a lot more upside yet on infrastructure as work on Gorgon continues to ramp-up and as major projects in Qld's coal seam gas sector begin late in 1 and in 11. Equipment spending edged.% lower in Q and there was a rare decline in intellectual property products (.7%), possibly both constrained by the loss of business confidence heading into the quarter. We expect rises in both going forward given favourable - GDP augmented by terms of trade real net national disposable income* real gdp Sep- Sep- Sep- Sep- Sep- Sep- Sep Capacity utilisation up, investment to rise - Sep- Sep- Sep- Sep- Sep- Sep- Sep-1 - net balance capacity utilisation (lhs) recessions % of GDP investment, % of GDP * (rhs) * nominal CAPEX plans by industry % chg, yr avg mining manufacturing services total financial years Sources: ABS, NAB, Westpac Economics % chg, yr avg History in real terms, Expectations in nominal th est f

3 1 December 1 fundamentals and limited spare capacity. By contrast, new building work, up.1%qtr, is likely to be lacklustre for a while yet. The overall business investment outlook is upbeat, as confirmed in the latest ABS CAPEX survey, with the mining sector particularly bullish and manufacturing sector intentions also strong. The States (Elliot Clarke) Public demand was a prime support for activity in all but Victoria in Q. Private demand growth in the quarter was strong in NSW, modest but still positive in WA, but negative elsewhere. On the housing front, NSW is benefitting most from a strong upswing in new residential construction, following a prolonged period of underperformance. Of the four major states, the consumer was particularly cautious in Qld and WA, where spending increased by just.% and was flat, respectively - in contrast to gains of.7% in NSW and 1.1% in Victoria. A bout of uncertainty appears to have been a constraining factor in Qld and WA, however, the income outlook in these - the mining states - is most positive. NSW was the fastest growing state in Q with state demand growth of 1.%,.%yr; the strength was broad based across both private and public demand. Consumption growth moderated to a still healthy.7% in Q while housing investment posted a strong % gain thanks to a near % surge in new dwellings investment now up almost 17% for the year. Business investment was also strong in the quarter at.%; engineering construction rose 17.%, non-residential building increased.% and machinery & equipment spending increased.1%. Public demand rose by 1.% in Q as public investment rebounded, +.% in Q. Victoria's state demand declined by.1% in Q; this was a surprise, but does come after growth of.% over the previous three quarters. In Q, consumption growth remained strong at 1.1%, helped by strong income growth. Housing investment fell by 1.% in Q as new dwelling investment fell.%; however, renovations bounced back, rising by.7% in Q after a % decline in H1 1. Business investment posted a second straight quarterly decline of.% as non-residential construction and machinery & equipment investment both declined by around 7%, offsetting a.% gain in engineering construction. A source of substantial support over the past year, public demand was flat in Q. Queensland state demand declined by.% in Q after Q's +1.% outcome; annual growth remains weak at 1.%yr, well below national domestic final demand growth (.%yr). In Q: consumption growth was soft at.% and there was substantial broad based weakness in dwelling investment ( 1.%). Machinery & equipment investment fell.7% after Q's % surge, but engineering construction rose 1.7% to leave business investment growth flat overall. Public demand rose by 1.% in Q, though public investment growth was soft at.%. 1-1 State demand %ch -. qtr 1. yr Qld Tas SA Aus Vic NSW WA 1. Terms of trade: fresh year high Wool boom 1/1 terms of trade, goods & services +% yr. %ch Sep- Sep- Sep- Sep-7 Sep- Sep- Sep-. % above avg Incomes boosted by terms-of-trade jump * smoothed terms of trade (lhs) 1 wages & company profits (rhs) * Sep- Sep- Sep- Sep- Sep- Sep South Australian state demand also declined by.% in Q; annual growth decelerated sharply to.7%, from.% in Q. Consumption growth was flat in Q and dwelling investment was weak at.% a.1% increase in new dwelling investment largely offset by a near 7% decline in renovations. Business investment fell.1% in Q as a.% decline in equipment investment offset a 1.% increase in engineering construction. Public demand rose by.% in Q with public investment up.1%. 1 Wage income by state 'resource' states 'south-east' - *nominal 1 Western Australia state demand growth was modest in Q at.%, but strong over the year (.%). Consumption growth was soft in Q (.1%), despite strong income growth; however, growth over the year is still strong at.7%. Residential construction rose by 1% in Q, but continues to lag the rest of the country over the year. Business investment rose by 1% in Q, despite a.% 1- - Sep- Sep-7 Sep-1 Sep- Sep- Sep- Sep-7 -

4 decline in engineering construction, on strong growth in machinery investment and non-residential construction; investment remains a key strength of WA, with annual growth of 1%. Public demand was also supportive in Q thanks to public investment. Tasmanian state demand grew by 1.1% in Q,.%yr. This was solely due to a 17% surge in public investment, most likely associated with the NBN trial. Private demand fell by.% in Q, driven by a.% decline in housing investment; consumption declined by.1% in Q, but business investment rose 1.%. GDP: the expenditure estimate (AH) The GDP(E) estimate was flat in the quarter, lowering annual growth to.% from.%. As noted earlier, domestic demand increased by.%qtr,.%yr Consumer spending recession-like current early s mid 7s early s real spending per capita 1 *base is avg sales in year prior to downturn; gradient lines show long run avg growth rate; markers indicate stimulus payments Source: ABS, Westpac Economics qrts Net exports and inventories were a drag on growth in Q. We expect both to more favourable in coming quarters. Net exports sliced.ppt off growth in Q after a.ppt boost in Q. Volatility in exports was the main force here, +.% Q and.% in Q. This profile was exaggerated by large swings in the volatile gold segment. We expect export volumes to trend higher in response to strong demand from Asia and as additional capacity comes on stream in the resources sector. Imports, down.% in Q, will increase at a strong pace in 11 with the dollar trading around parity and as business investment advances. On balance, we expect net exports to be a modest drag on growth next year. Inventories took.ppt off Q growth, with a.ppt impact from non-farm inventories only partially offset by a +.1ppt impact from farm stocks. Non-farm inventory levels, which fell.% in the quarter, will need to rise to meet growing domestic demand. That will see inventories add to growth either in Q or over the first half of 11. Household sector (Matthew Hassan) Consumer spending (.%qtr,.%yr): after a flourish in the June quarter, spending was much more subdued in the September quarter. The.% rise was a notable step-down from the 1.% increase in the previous quarter, although the result was in line with expectations. Major revisions to historical estimates have significantly lowered the spending trajectory since late and dramatically altered the profile of household savings. The message: the cautious consumer has been much more cautious than previously indicated and remain firmly in 'lock-down' mode. For the quarter, the spending detail was largely as expected. As indicated by the retail survey and vehicle sales data, there were strong gains in 'small ticket' discretionary items cafes & restaurants (+1.%qtr), and recreation & culture (+1.%qtr) in particular but lacklustre spending on 'big ticket' discretionary items with furniture & household appliance up just.1%qtr,.%yr and vehicles sales partially reversing a big jump in June (down.1%qtr after a 1.%qtr rise in Q). The latter was reportedly partly due to insurance-funded replacement purchases following hailstorms in Victoria and WA. The extent of consumer caution is most striking when spending is viewed in per capita terms. Australia's population is currently rising at around %yr, just short of.%qtr. Spending is barely exceeding population growth. Indeed, if we compare the trajectory of per capita spending since, it is tracking well below the paths seen during outright recessions in Australia (see chart), episodes in which the unemployment rate blew out by -ppts and, in the early 1s and early 1s rose well above 1% Household labour income growing again labour income total income after tax and interest *real Household savings ratio % income current qtrly %ch previously published post avg doubled equates to ~$bn - - Sep- Sep- Sep- Sep- Sep- Sep- Sep-1 Household incomes vs spending massive policy boost to disposable incomes - Sep- Sep- Sep- Sep-7 Sep- Sep- Sep-1 % income Sources: ABS, Factset, Westpac Economics 1 *nominal consumption labour income income after tax and interest - Sep- Sep- Sep- Sep- Sep-7 Sep- Sep- Sep

5 Although spending was subdued, households saw good income gains in Q. Total wage income rose 1.%qtr, building on a.% jump in Q and a 1.% surge in Q1 to be up 7.%yr, the strongest annual growth since March. The quarter saw a more subdued.% rise in average non-farm compensation per employee though after Q's impressive.7% jump. The solid rise in wages combined with a strong gain in nonwage incomes and a pause in interest rates to give a big boost to disposable incomes. Real household disposable income rose 1.%qtr, the strongest quarterly rise since the stimulus payment boost in late, and prior to that since late an ominous comparison for RBA-watchers as this previous period marked the ramp-up phase in the mining boom that went on to present a major challenge to policy makers. However the September quarter national accounts highlight one stark difference between the household sector in late and now households are now much more inclined to save income gains rather than spend. As mentioned, the ABS has revised its household savings estimates up substantially (see chart). The data now shows households have been saving 1% of their disposable income over the last two years, more than doubling previous savings rates estimates. The average savings rate in was.%. Not only does the revised track show a much more dramatic up-shift in savings, it also implies there has been little or no reversion over the last year. The numbers suggest the cautious, risk-averse, debt-averse consumer behaviour that has been a feature since 7 has been both more intense and more persistent than previously thought. Incomes: (MH) The GDP(I) estimate rose.% in the quarter, slightly above the headline gain although at.%, through the year growth is the weakest of the three measures. Australia's terms of trade rose.% in Q to be up %yr the continues to push towards new year highs. Real GDP estimates tend to understate the effects terms of trade swings as these are price shifts rather than a change in the physical volume of goods and services. However, the ABS produces a variant of real GDP that incorporates the 'real income' effect of shifts in the terms of trade called 'real net national disposable income' (see chart on page ). As you would expect, real net national income posted much stronger growth than real GDP through the mining boom (.%yr vs.%yr) after basically matching historical growth rates prior to. The latest kick up in the terms of trade has again given a big boost to real net national disposable income which is again growing at mining boom rates despite a subdued GDP growth picture. Production: an industry perspective (AH) The GDP(P) estimate increased by.%qtr,.%yr. That's more positive than the other two estimates, with annual growth on GDP(E) at.% and on GDP(I) at.%. We're inclined to believe the production estimate at this point in time. It's notable that hours worked in the labour force survey are up.%yr. Non-farm GDP surprised with a decline in Q - printing at.%qtr,.%yr. More favourable seasonal conditions in the farm sector saw farm GDP provide an offset, 1. %qtr, 11.1%yr. On an industry basis, gross value added increased by.% over the last year. However, growth was just.% in Q, with agriculture the stand-out. Elsewhere, conditions were generally patchy. A number of industries have done well over the last four quarters. For instance mining (+.%yr, but.7%qtr in Q); manufacturing (+.%yr, but.1%qtr in Q); construction (+.%yr, but.%qtr in Q); and professional, scientific and technical services (+.%yr, but.%qtr in Q). As for wholesale and retail, they continued to struggle (.%qtr,.%yr and.1%qtr, 1.%y respectively). Prices (AH) On the prices front, the consumption deflator increased by just.% in the quarter, leaving annual growth little changed at.1%. The GNE deflator (which is unaffected by the terms of trade) increased by.%qtr,.%yr. While the GDP implicit price deflator was up 1.1%qtr to be up a sizeable.% over the year reflecting the boost from higher export prices. Westpac Economics Matthew Hassan & Andrew Hanlan, Senior Economists ph (1-) 1, 7 Elliot Clarke, Economist ph (1-) 7 The gains from surging commodity prices continue to flow to profits, albeit at a more subdued pace in the September quarter. Non-financial corporations posted a.%qtr rise but following.% and.% gains in Q and Q1 are up 1.%yr. Financial corporations posted a better 1.% gain in the quarter but have seen understandably slower annual growth of.%yr a touch under nominal GDP growth. Small businesses and farms had a better quarter with mixed income up.%qtr and.%yr. The combination of improved farm conditions and recent strength in consumer spending on 'small ticket' items cafes & restaurants in particular appear to be giving a significant uplift to this income stream.