Australia: Economy expanded by 0.6% in the September quarter - Westpac

The Australian economy expanded by 0.6% in the September quarter for annual growth of 2.8%, notes the research team at Westpac.

Key Quotes

“This represented a lift in the annual growth rate from 1.9% in the year to the June quarter following the dropping out of the -0.3% for the September quarter last year, when the economy stalled partly due to the July Federal election.”

“Markets would be disappointed with this result with general expectations around 0.7% (Westpac 0.8%).”

“The major surprise came with the insipid 0.1% growth in consumer spending - general expectations were for a 0.4% increase. The 0.1% increase, which was in line with particularly weak retail sales for the period, matched the outcome for the December quarter 2012, which together were the weakest quarters since 2008 - which was associated with the GFC.”

“Further indications of household caution came with the 4.8% fall in expenditure on home renovations.”

“Total labour income was somewhat stronger than in previous quarters, up 1.2%, to be up 2.9% for the year. Real disposable income lifted by 0.4% to be up a still very weak 0.6% for the year.”

“The household savings rate increased for the first time in five quarters from 3.0% to 3.2% despite the better than expected boost to labour incomes. The savings rate has moderated from 4.9% a year earlier.”

“The weakness in consumer spending and the rise in the savings rate in Q3 pose risks to the outlook for consumer spending.”

“Before today’s report it appeared that the household sector was prepared to maintain a pace of consumer spending in excess of income growth by running down savings. Presumably households expected income growth to lift in due course and preferred to maintain a spending pace that could not be sustained indefinitely without much stronger income growth.”

“The message from this report may be that households are accepting of a lower profile for income growth and are now adjusting to that outlook. Such a development would certainly jeopardise the authorities’ current consumer spending growth forecasts of 2.75% in 2017/18 and 3.0% in 2018/19.”

“The Westpac Melbourne Institute Index of Consumer Confidence has been signalling a rise in consumers’ risk aversion for some time and these results tend to support that observation.”

“The non-residential construction cycle is boosting growth significantly through both business and public. Private business construction in Q3 was 3.6%qtr, 12%yr.” 

“There was also a solid 1.1% lift in equipment investment in the quarter to be up 2.9% for the year.”

“However the residential construction cycle appears to have peaked despite the modest 1% increase in new construction (following 3 negatives in the past four quarters). New dwelling activity is now 2.2% below the peak of mid-2016.”

“Inflation is subdued with the household consumption deflator increasing by only 0.1% in the quarter and by 1.1% over the year.”

“This report gives us no reason to change our interest rate outlook or growth forecast – expecting no RBA rate increase in 2018, with growth slowing to a below trend 2.5% in 2018.”

“A constrained consumer and the associated uncertainty for business will make it very difficult for the RBA to achieve its 3.25% growth forecast for 2018.”

“The RBA’s inflation forecast of 1.75% for next year looks to be in line with the information in this report.”