9 March 2018 AUSTRALIAN ECONOMIC DEVELOPMENTS. Services and construction stay on track in February

Transcription

1 AUSTRALIAN ECONOMIC DEVELOPMENTS 9 March 2018 This week the Reserve Bank of Australia (RBA) left the cash rate on hold at a record low of 1.50%, where it has been since August The accompanying statement remained upbeat about the outlook. Positive business conditions, increases in non-mining business investment and public infrastructure spending are supporting economic growth in 2018 along with a further reduction in the unemployment rate. The main uncertainty for the RBA is weaker consumer spending. In a separate speech RBA Governor Philip Lowe said With the economy moving in the right direction, and interest rates still quite low, it is likely that the next move in interest rates in Australia will be up, not down. Having said that the Board does not see a strong case for a near-term adjustment on monetary policy. Confirming recent positive trends in business conditions, Ai Group s monthly business surveys (the Australian PMI, PSI and PCI ) all indicated expansion in February. The ABS National Accounts data released this week estimates that Australian GDP grew by 0.4% in the December quarter (Q4) of 2017 and just 2.4% p.a. Household consumption and public investment were stronger in Q4, but mining investment and exports dropped in the quarter, which held back growth. Income growth remained weak in 2017 however, with real net national disposable income up only 1.5% p.a. and was flat in per capita terms (that is, no growth in real net income per head). Services and construction stay on track in February Business conditions remained positive in February with the Australian Industry Group s Performance of Manufacturing Index (Australian PMI ), Performance of Services Index (Australian PSI ) and Performance of Construction Index (Australian PCI ) all indicating reasonable rates of expansion (see Chart 1). In all three surveys, results above 50 points indicate expansion with higher results indicating a stronger expansion. The Australian PSI fell 0.9 points to 54.0 points in February (seasonally adjusted), indicating a slightly softer -but still reasonably positive - rate of expansion compared to January. The two fastest growing sub-sectors were finance & insurance; and personal & recreational services, with property & business services also contributing strongly. In contrast, the retail services sub-sector dropped further into contraction in February. ABS retail sales data released this week for the month of January showed total nominal retail sales rose by just 0.1% m/m following a 0.5% m/m fall in December. Local discretionary retail activity remains an anomaly in the improving economy; changing consumption patterns (with more spending on services and less goods) plus disruption from online competitors continue to put pressure on this sector. 1

2 The Australian PCI recorded its thirteenth consecutive month of expansion, rising 1.7 points to 57.0 in February. House building led the way jumping 9.8 points to 61.8 points, while engineering construction, commercial construction and apartment building also expanded. Respondents to the Australian PCI noted a solid pipeline of work and more projects starting in February. Chart 1: Australian PMI, PSI and PCI, trend Source: Ai Group Economy grows by 2.4% p.a. in December quarter (Q4) 2017 The ABS National Accounts data indicate that Australia s real GDP grew by 0.4% q/q in the December quarter (Q4) of 2017, slowing the annual growth rate to 2.4% p.a. from a revised 2.9% p.a. in the September quarter (Q3) (Chart 2). Chart 2: Real GDP growth, annual and quarter to Q Source: ABS, National Accounts, Dec

3 On the expenditure side, growth in Q4 was dampened by weaker business investment and exports, both of which fell in the quarter but were higher over the year (see Table 1 and Chart 3). Private business investment fell by 2.7% in Q4 due to new LNG platforms being installed in the Northern Territory. These showed up in the data as a lump in new engineering construction in Q3 (+6.3% q/q) followed by a fall in Q4 (-10.3% q/q). Outside of engineering construction investment, there was strong investment growth for new buildings (+3.3% q/q), new machinery and equipment (+3.0% q/q) and a modest increase in intellectual property investment (+0.6% q/q). Net exports also contributed to a temporary drag on growth in Q4, due to a decline in the quarter in tourism exports and rural export volumes. Total exports remained 0.8% higher over the year. Most positively in Q4, domestic growth was buoyed by an increase in real household consumption, which rose by 1.0% q/q and 2.9% p.a., its strongest increase in several years. This has a large effect on headline GDP because household consumption accounts for 59% of GDP. This rise therefore contributed 0.6 percentage points to GDP growth in Q4. Also on the expenditure side, public sector investment increased by 2.9% q/q, driven by an asset transfer from the private sector. Chart 3: Investment spending, to Q Source: ABS, National Accounts, Dec

4 Table 1: Key components of GDP, Q seasonally adjusted % q/q % p.a. ppt, contribution to growth Real GDP Household consumption General government consumption Total investment Dwelling investment Private Business investment New building New engineering construction New machinery and equipment Intellectual property investment Public (government) investment Domestic final demand Change in inventories na na 0.0 Exports Imports Net exports -0.5 Terms of trade Real gross domestic income Real net national disposable income Real GDP per capita Nominal GDP Compensation of employees (wages & incomes) Private profits - total Private profits financial corporations Private profits non-financial corporations Source: ABS, National Accounts, Dec Output growth spreads across more industries Industry output grew in 16 of the 19 major industries in 2017, with only agriculture (-8.8% p.a.), personal services (-0.7% p.a.) and wholesale trade (-0.4% p.a.) decreasing. Hospitality had the strongest annual growth (6.7% p.a.), followed by health (6.4% p.a.) and construction (4.9% p.a.). Manufacturing recovered 2.5% of its output in 2017, despite a small fall in Q4 (-1.0% q/q). The large machinery and equipment manufacturing sub-sector fell 7.3% q/q, driven by a 22.2% q/q decline in transport equipment (including passenger cars). Output from the food, beverage and tobacco sub-sector fell by 0.9% q/q in Q4, after rising by 7.0% q/q in Q3. These falls in Q4 were partially offset by a rise in petroleum, coal, chemical and rubber products (4.2% q/q). In absolute terms, the largest additions to real value-added output came from the finance and insurance sector, which added $38.4bn in output in Q4 (seasonally adjusted and inflation adjusted), followed by construction (+$32.3bn q/q) and health (+$31.7bn q/q). 4

5 Chart 4: Industry output, size and annual growth rates, Q Source: ABS, National Accounts, Dec 2017 Interestingly, industry output fell across all sub-sectors within the utilities sector in Q4. The fall in industry output within the utilities sector aligns with a 3.1% q/q decrease in real household final consumption expenditure on electricity, gas and other fuel that was also apparent in Q4. Households appear to be responding to large price rises for utilities by cutting back on their consumption. Recent CPI pricing data indicates that average retail prices rose strongly in 2017 for electricity (+12.4% p.a.), gas (7.8% p.a.) and water (3.2% p.a.). National income growth flat in 2017 National income growth was relatively weak in 2017, despite an apparent recovery in GDP and in domestic demand. In per capita terms, real net national disposable income (the ABS preferred measure of living standards) fell by 0.3% in Q4 of 2017 and was flat over the year. This reflects weaker export earnings due to a small fall in the terms of trade in 2017 (-1.0% p.a.) because Australian incomes are heavily exposed to the terms of trade (Chart 5). In the absence of another terms of trade boom, the best way to support broad-based real income growth is through stronger productivity growth. Productivity growth has remained weak in Australia this century. At a national level, the National Accounts indicates that gross value added per hour worked in the market sectors fell in three of the four quarters of 2017, to be down by -0.8% over the year. Real unit labour costs for the non-farm economy finished % higher than a year earlier. The lack of national productivity growth is also evident in Australia s GDP per capita. In Q4 2017, real GDP per capita was flat (again) in the quarter, and up by just 0.8% over the year. Growth in real GDP per capita has averaged only 0.9% p.a. over the past five years. The difference between this per capita rate of GDP growth and the headline growth rate (2.4% p.a. in Q4 2017) is indicative of our reliance on population growth to drive growth in aggregate output and incomes. 5

6 Chart 5: GDP per capita, national income per capita and the terms of trade Source: ABS, National Accounts, Dec This relatively weak growth in income was distributed fairly evenly in 2017, such that the shares of total factor income derived from each source were largely unchanged from a year earlier. In nominal terms (that is, not adjusted for inflation), total compensation of employees (including wages, salaries, superannuation contributions and other social contributions) rose by 4.8% p.a., accounting for 52.9% of total factor income in Q4 2017, compared with 52.4% one year earlier. A large part of this growth in aggregate employee income was due to workforce growth - average compensation per employee was up by just 1.6% p.a. for all employees, or 1.8% p.a. for nonfarm employees. The ABS notes that total compensation of employees rose more strongly in the public sector than in the private sector in 2017 and was especially strong in healthcare, education, public administration, construction and finance, in line with stronger employment growth in these industries over the year. Gross operating surplus (gross profits) for private sector non-financial corporations rose by 4.1% p.a. Growth in this type of income is extremely volatile from quarter to quarter, largely due to big swings in commodity prices and exports that affect nominal gross profits in mining. Gross operating surplus (gross profits) for financial corporations (including banks, finance providers and all superannuation funds) rose by 7.7% p.a., accounting for 6.6% of total factor income in Q4 2017, compared to 6.3% one year earlier. The share of national income derived from this category has been rising over a very long period (Chart 7). Income derived from dwellings owned by persons (excluding dwellings owned by corporations) was up by 3.8% p.a. in 2017 and has been gently rising as a share of national income over a long period. These rises in income in 2017 were offset by falls in nominal income for private sector unincorporated businesses (gross mixed income fell by 3.7% p.a.) and public sector non-financial corporations (-14.8% p.a.). 6

7 Chart 7: Shares of nominal total factor income, % share to Dec 2017 Source: ABS, National Accounts, Dec 2017 Broad-based growth across the states in 2017 State final demand (the equivalent of national domestic final demand or total expenditure net of exports) increased in all states and Territories except for the Northern Territory and the Western Australia in Q4. Over 2017, growth ranged from -3.1 % p.a. in the Northern Territory to 4.9% in South Australia. The Northern Territory was negatively affected by a 24.0% decrease in private investment in Q4. Private investment figures in the resource rich states can be especially volatile due to the timing and nature of large lumpy mining and/or LNG projects. Across the states in Q4: New South Wales grew by 1.0% q/q and experienced broad growth across consumption and private investment, which was partially offset by a fall in government investment. Victoria s growth slowed to +0.3% q/q in Q4 from +0.9% in Q3. Household and government consumption contributed strongly to growth, while government investment increased by 11.7 % q/q, driven by investment spending from state and local governments. Private investment fell by 6.0% because of a fall in non-dwelling and dwelling construction. Queensland s growth accelerated to 0.9% q/q from 0.5% q/q in Q3. A fall in private investment detracted from growth due to lower non-dwelling construction. This was partially offset by rising expenditure on machinery and equipment. South Australia s state final demand jumped 0.8% q/q to be up 4.9% p.a., largely off the back of strong household consumption. Commonwealth government spending in South Australia contributed to a 1.1% q/q rise in government consumption. Private investment reduced by 3.3% q/q as a result of reduced investment on machinery and equipment. 7

8 Western Australian growth fell by 0.2% q/q after a strong rise of 1.4% q/q in Q3. Private investment fell by 2.0% q/q because of a large fall in non-dwelling construction. Tasmanian state final demand jumped 1.3% q/q to be up 4.8% p.a. Household consumption was the major contributor to growth in Q4 while government investment also increased by 11.8% q/q. Table 2: State final demand, Q Seasonally adjusted, real Government consumption Household consumption Private investment Government investment state final demand state final demand % q/q % q/q % q/q % q/q % q/q % p.a. NSW Victoria Queensland South Australia Western Australia Tasmania NT ACT Australia (domestic final demand) * State Final Demand plus net exports is a proxy measure of State Domestic Product (the state equivalent of GDP) but is not exactly equal to it. 8

9 This week s data and events, 5 March 9 March 2018 Day Date Data / event Data period Current release Mon 5 Mar Ai Group Australian PSI Feb (M) 54.0 points ABS Business Indicators Dec (Q) Company gross operating profits +2.2% q/q. +4.3% p.a. ABS Building Approvals Jan (M) +17.1% m/m, +12.0% p.a. ANZ Job Ads Feb (M) -0.3% m/m, +13.3% p.a. Tue 6 Mar RBA cash rate decision Mar (M) Cash rate: 1.50% p.a. ABS Balance of Payments Dec (Q) Current account deficit $14.0bn, -27.0% q/q ABS Retail Trade Jan (M) Nominal sales +0.1% m/m Wed 7 Mar Ai Group Australian PCI Feb (M) 56.0 points Thu 8 Mar ABS National Accounts Dec (Q) GDP +0.4% q/q +2.4% p.a. RBA Governor, Phillip Lowe, speech on The Changing Nature of Investment International Trade in Goods and Services - Jan (M) Imports $32.9bn, Exports $33.9bn M = monthly. Q = quarterly. H = half-yearly. A = annual. B= bi-annual. All data are seasonally adjusted unless otherwise noted. Next week s data and events, 12 March 16 March 2018 Day Date Data/event Data period due for release Tue 13 Mar ABS Housing Finance Jan (M) NAB Business Confidence Feb (M) Previous release Dec (M): no. of commitments 2.3% m/m Jan (M): conditions +19 points, confidence +12 points Westpac Consumer Sentiment Mar (M) Feb (M): points, -2.3% m/m Thu 15 Mar Overseas Arrivals and Departures Jan (M) Dec (M): arrivals -1.7% m/m, departures -1.6% m/m ABS Industrial Disputes Dec (Q) Sep (Q): working days lost 148,900 RBA Bulletin Mar (Q) Dec (Q): N/A M = monthly. Q = quarterly. H = half-yearly. A = annual. All data are seasonally adjusted unless otherwise noted. 9

10 Australian economy: latest full-year growth rates and government forecasts Dec 17 Jun 18 Dec 18 Jun 19 Jun 20 RBA SoMP (Feb 2018) actual actual f f f f GDP, % change p.a., year end f Unemployment rate, %, year end Inflation (CPI), % change p.a., year end Treasury MYEFO (Dec 2017) actual actual f f p GDP, % change p.a., year average Household consumption, % p.a., year average Dwelling investment, % p.a., year average Business investment, % p.a., year average p Employment growth, % p.a., year end Unemployment rate, %, year end Terms of trade, % change p.a., year end Inflation (CPI), % change p.a., year end Wages (WPI), % change p.a., year end f = forecast. p = projection. Sources: ABS various data; RBA Statement on Monetary Policy (SoMP), latest quarter; Australian Treasury, MYEFO (Dec 2017). Australian economy: latest indicators Economy FX and commodity prices (Friday morning) RBA official cash rate, % Mar (M) AUD/USD exchange rate US$ Real GDP, % change p.a. Dec (Q) 2.4% Oil price (WTI light crude, USD/BBL) US$60.31 Headline CPI, % change p.a. Dec (Q) 1.9% Gold price (USD/OZ) US$1, Unemployment rate, % trend Jan (M) 5.5% - Copper price (USD/tonne, LME spot) US$6, Australian Industry Group monthly performance of industry indexes Australian PMI Feb (M) 57.5 Australian PSI Feb (M) 54.0 Australian PCI Feb (M) 56.0 M = monthly. Q = quarterly. All data are seasonally adjusted unless otherwise noted. Arrows represent direction of movement relative to last week for prices, and last observation for growth rates and indexes. Sources: ABS various data; Ai Group; Australian Financial Review market prices (as of Thu); London Metals Exchange market prices (as of Fri). Ai Group Economics and Research Team Julie Toth Chief Economist (03) David Richardson Senior Economist (02) Colleen Dowling Senior Research Analyst (03) Andrew Bridger Economist (03) Molly Knox Research Assistant (03) economics@aigroup.com.au 10