The Reserve Bank of Australia (RBA) has wound its forecast for economic growth down to 2.5% in 2019, just two months after providing a marginally more bullish 2.75% forecast. After two successive interest rate cuts, but with challenges on the domestic and global front, the downgrade was perhaps inevitable. The RBA has retained its 2.75% forecast for 2020.
Examining the March quarter’s Gross Domestic Product (GDP) data, the 0.4% rise fed into GDP that grew just 1.8% over the year-ended March 2019.
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As discussed elsewhere in this edition of Statistics Count, there are plenty of drivers for lacklustre economic growth. Employment growth would normally have been one factor driving higher GDP, but labour underutilisation is biting the economy. One factor that remains lower than expected and below target is the inflation rate, measured by the Consumer Price Index (CPI).
Headline CPI rose 0.7% in the June quarter, but that fed into annual inflation growth of just 1.6%. In 2019, the RBA expects inflation to be below 2.0% (another downgrade), make it to 2.0% in 2020 and will not rise above that until 2021.
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On monetary policy – interest rates – the RBA retains its watching brief on the labour market, saying:
“The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable economic growth in the economy and the achievement of the inflation target over time.”
In its Economic Outlook, the RBA recognises that currency and bond markets have factored in a further interest rate cut late in 2019 and another in mid 2020.
Feeding into that scenario is the RBA’s expectation that the dwelling investment trough will not arise until late 2020, meaning it expects further falls over the remainder of 2019 and into 2020. As it stated:
“This is about half a year earlier than previously anticipated because of the earlier-than-expected signs of a turnaround in established housing market conditions and the lower profile assumed for the cash rate.”
Economic growth will continue, according to the RBA, to be supported by a continuation of public sector expenditure, including on programs like the National Disability Insurance Scheme (NDIS). Because public expenditure is already high, the continuation will contribute to the maintenance of economic growth, rather than drive any expansion.
Business investment on the other hand, is expected to expand on the previously advised trend. The RBA said:
“In non-mining sectors, the outlook for non-residential construction remains positive: building approvals remain fairly steady, and there is a solid pipeline of private infrastructure projects (particularly transport and electricity).”
The central bank also expects investment in equipment and software to expand.
Detailed below, we can see the main contributions to economic growth in Australia, over the last five years. The important and virtually continuous role of Government expenditure (in blue) is clear, as is the important but mercurial role of business investment (in red). It is notable that the only periods where GDP growth (the black line modelled on the right hand axis) moves up is when both business investment and government expenditure are growing.
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The second chart shows the contributions to GDP of the Household and Building sectors. Inevitably, it exposes the primacy of household consumption expenditure (in blue), but it also demonstrates that current investment levels on new dwellings (in red) and alterations and additions (in pink) are dragging economic growth down.
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A more detailed view of household expenditure is available, by examining the following chart and its notes. To put it simply, Australians are spending on the essentials and pulling back on the discretionary expenditure. And that is what you do when your wages haven’t grown much and essential costs like food and power are rising.
Drilling into GDP further, we can see in the chart below that when it comes to residential dwellings, there has been a decided downturn in the total pipeline of activity, most of which has been fuelled by higher-density dwellings (the left hand side), with activity declining most steeply in Queensland, New South Wales and Western Australia (the right hand side).
In addition to slowing new work, the RBA in its Statement on Monetary Policy said:
“Despite some stabilisation in established market conditions, housing market turnover remains around its lowest level in recent decades. The decline in housing market turnover led to a sharp decline in the national accounts measure of private ownership transfer costs in the March quarter, which subtracted 0.2 percentage points from quarterly GDP growth.”
This drag on GDP will, according to the RBA, turn around relatively quickly, and indeed, improving auction clearance rates are already thought to be making an improved contribution.
The summary?
Australian economic growth is under pressure. Government expenditure and shortly, business investment will play their part, but the underemployment and wages genies have to come out of the bottle for household consumption to turn back up and really kick the economy along.
