Australia’s economic growth was in positive territory in the September quarter, but has failed to excite commentators and markets because it was weaker than expected at 2.8% for the year-ended September 2018. The seasonally adjusted figure was below the annualised 3.1% recorded in the June Quarter, and well below the RBA’s expectation of 3.5% growth in 2019.
The chart below shows Australia’s total annualized GDP since 2011.
To go straight to the dashboard and take a closer look at the data, click here.
As with all things economic, the devil is in the detail, and it is here that we find grounds for both emerging confidence and watchful pessimism. Business investment was positive for the third consecutive quarter, adding 0.6% to annualized GDP. That is a welcome contribution from activity that was sluggish at best over the course of the last few years.
As ever, general government expenditure was a major contributor to economic growth. Adding 0.9% over the year-ended September, it was bested only by solid household consumption growth (+1.1%), although that does of course have a sting in its tail, as we will discuss below. The other contributors to growth were dwelling construction (+0.1%) and exports (+0.8%).
However, there were also drags on economic growth, not least of which was imports (-0.8%) with a solid rise in the value of imports attributable at least in part to a depreciated Australian dollar over the course of the last year. At -0.0%, the decline in inventory reflects a modest reduction in the value of production over the period.
The data surrounding the contribution of business investment to Australia’s Gross Domestic Product is worthy of more detailed examination, because it feeds into other important analysis.
First, after the quite long period over which business investment was negative, investment in the past 3 quarters has been a positive contribution to growth. Though welcome, there is still the suspicion that increased investment is in many respects catching up with lost ground. The other suspicion that immediately arises is that most of the investment remains funneled to the resources sector, a factor that may also feed into the larger contribution for exports.
Second, profit, here measured as the gross operating surplus as a proportion of total factor income, continues to be at record levels, hitting 28.1% on a seasonally adjusted basis. We can see this in the chart below.
However, at the same time, the share going to wages remains stagnant, and at the bottom of its long-term range at 52.2%, as the chart below demonstrates.
In this context, businesses ought be investing more, because their net capacity is growing, while that of households is stable.
Third, we can see this constraint upon households in the average household savings data. At just 2.4%, savings, especially considered alongside record levels of household debt and poor wages growth, mean households are unable to make much of a contribution to economic growth right now. We might well find that the +1.1% contribution of household consumption is actually a little too high and has added to household indebtedness over the last quarter.
We hear – and observe on the High Street – that it is almost never been tougher to be in retail. Lousy household consumption, combined with e-commerce, really is the result of an over-indebted society. It is fortunate that unemployment has trended down, but without wages growth, the effect of full employment on economic growth will remain muted.
If either unemployment rises markedly or interest rates are forced higher, high levels of indebtedness, low levels of savings and poor wages growth could combine to create the perfect storm that would shock the economy toward and possibly into recession. We are not there yet, but the storm clouds on economic growth are banking up.
