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First Impressions: Australian Q1 GDP

Q1 GDP: 0.4%qtr, 1.8%yr. A downside surprise, detail on the soft side – private demand contracting.

Q1 GDP

  • Sluggish output growth has extended into 2019, with Q1 printing at 0.4%qtr, 1.8%yr.
  • This was a downside surprise and the detail was on the soft side.
  • Annual output growth is now the slowest since 2009Q3, when the GFC impacted.

Key surprises

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  • The expenditure measure of GDP grew by only 0.2%. We expected a figure close to 0.5%/0.6%.
  • Key surprises were: (1) consumer spending disappointed, 0.3% vs a f/c 0.4%; (2) ownership transfer costs (relating to real estate turnover) fell very sharply, -13%; and (3) inventories were a negative, -0.1ppt vs a f/c flat ~ suggesting a larger drag from ‘other’ inventories.
  • Domestic demand grew by only 0.1% vs a f/c 0.3%. Private demand contracted in the quarter, -0.2% and contracted over the past 3 quarters, -0.3%.
  • Annual GDP growth at 1.8% is a full percentage point below ‘trend growth’, judged to be 2.75%.

Details

  • Real GDP: 0.4%qtr, 1.8%yr
  • Nominal GDP: 1.4qtr, 4.9%yr
  • Terms of trade: 3.1%qtr, 6.0%yr
  • Hours worked: 0.9%qtr, 2.8%yr
  • Domestic demand: 0.1%, 1.6%yr
  • Inventories: -0.1ppt qtr
  • Net exports: +0.2ppts qtr
  • Consumer spending: 0.3%qtr, 1.8%yr
  • Home building: -2.5%qtr, -3.1%yr
  • Business investment: 0.5%qtr, -1.3%yr
  • Public demand: 1.1%qtr, 5.7%yr
  • Farm output: -0.2%qtr, -6.8%yr
  • Wage incomes: 1.2%qtr, 4.3%yr
  • Wages (average earnings non-farm sector): 0.4%qtr, 1.4%yr
  • Household consumption deflator: 0.4%qtr, 1.5%yr
  • Household saving ratio: 2.8%, up from 2.6% in Q4 but down from 3.9% a year earlier.

Comments

The economy lost considerable momentum in 2018, slowing from around a 4% annualised pace in the first half of the year to around a 1% pace in the second. Sluggish conditions have extended into early 2019.

The slowdown was centred on housing and the consumer against the backdrop of a further tightening of lending standards and persistent weak wages growth. A negative supply shock from the drought in NSW and surrounds is another negative.

Mid-2018 was the turning point for new home building, with strong gains now giving way to sizeable declines. The slump in dwelling approvals points to the downtrend continuing in 2019. Dwelling activity fell further in Q1, down 2.5%.

Consumer spending has shifted to a lower growth path constrained by weak wages growth, high debt levels and declining house prices, with the savings rate edging higher suggesting a negative wealth effect may be impacting. Consumer spending rose by only 0.3% in the quarter, following a 0.3% in Q3 and a 0.4% in Q4, with annual growth now at 1.8% – the slowest since mid-2013.

Notably, there is a stark divide between private demand and public demand. Private demand is particularly weak, down 0.2% in the quarter and down 0.3% over the past three quarters. Public demand (accounting for 25% of the economy) is up 1.1%qtr, 5.7%yr in Q1.

Public demand is a source of strength, with growth well above trend. Spending on health and on transport infrastructure projects are trending sharply higher. Tax revenues have been boosted by higher profits (centred on mining) providing the government with additional flexibility on fiscal policy.

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The national income picture remains positive. The terms of trade rose by 3.1% in the quarter, to be 6.1% above a year ago.

National income (nominal GDP), in Q1 grew by a robust 1.4%qtr, 4.9%yr

Exports resumed their uptrend in the quarter, advancing by 1.0%. That followed a disappointing second half of 2018, when volumes were flat in Q3 and slipped 0.5% lower in Q4 – dented by drought and supply disruptions in the resources sector.

Net exports were a swing factor over the past year, turning around from a negative in Q4, a -0.2ppt impact, to being a positive in Q1, adding 0.2ppts.

Business investment was mixed in the quarter, +0.5%qtr, -1.3%yr – with the recent completion of work on major gas projects still a drag in the period.

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