National Accounts - GDP Stuck in a Low Gear

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1 Data Snapshot Wednesday th December 13 Wednesday th December 13 National Accounts - GDP Stuck in a Low Gear GDP grew by. in the September quarter, which remains in the quarterly-growth range of.5-.7, witnessed for over a year. It leaves the annual rate of growth at.3, well below the 3. trend rate of growth. Today s GDP numbers showed an economy that is still stuck in a low gear and yet to show solid signs of a successful transition away from an economy reliant on mining investment for growth. The household savings ratio rebounded to 11.1 in the September quarter, from 1. in the June quarter. This lift indicates that households are still choosing to save more of their incomes rather than spend, despite rising wages. Today s data was a little disappointing given the range of recent data signalling some improvement. That said, GDP data is historical and we expect growth to improve in coming quarters, albeit gradually. The sub-trend pace of growth means it is wise for the RBA to maintain a bias to cut rates, but we think it will remain only a bias. We believe there will be no further rate cuts from the RBA but policymakers will keep rates low for longer instead to support growth Gross Domestic Product 1 Domestic Demand Y/Y Y/Y - Q/Q - - Q/Q

2 Data Snapshot Wednesday th December 13 The GDP numbers showed an economy that is still stuck in a low gear and yet to show solid signs of a successful transition away from an economy reliant on mining investment for growth. GDP grew by. in the September quarter, which remains in the quarterly-growth range of.5-.7 witnessed for over a year. It leaves the annual rate of growth at.3, well below the 3. trend rate of growth. Today s GDP numbers are historical, reflecting the three months to September. The data we have had since then, for the December quarter, has been encouraging and suggests the economy is improving, if only gradually. The sub-trend pace of growth means it is wise for the RBA to maintain a bias to cut rates, but we think it will remain only a bias. We believe there will be no further rate cuts from the RBA but policymakers will keep rates low for longer instead to support growth. Selected Expenditure Items on GDP, Chain Volume Measures Quarterly Change Household Consumption. Dwelling Investment -.5 Total Investment (Private & Public) -. Contribution to GDP ppt Inventories -.5 Net Exports.7 GDP Expenditure Measure: - Household Consumption Spending by households rose by a modest. in the September quarter, and by 1. over the year. Growth in household consumption remains well below the long-run average of 3.3, and despite interest rates being at low levels. Rising household wealth and a pickup in consumer confidence appear also to have had a limited impact on overall household spending. The soft outcome in the quarter was a little surprising given retail spending had begun to show signs of improvement. However, categories outside of retailing were generally weak. Services including health (-.), electricity, gas and other fuel (-.), transport services (-.5), communications (-.1) and other goods and services (-.) declined. Spending on hotels, cafés and restaurants also fell (-.3). The strongest areas of spending were in insurance and other financial services (.3), clothing and footwear (1.) and alcoholic beverages (.). The cautious behaviour among households is continuing. While concerns about a softer labour market and softening wage growth might be weighing down consumer spending, an increase in the household savings ratio suggests that consumers continue to have the means to spend. If

3 Data Snapshot Wednesday th December 13 consumer confidence remains elevated, there is a greater possibility that some of this potential spending power becomes unleashed. - Dwelling Investment Dwelling investment fell.5 in the September quarter, following a. increase in the previous quarter. While new dwellings rose. in the quarter, alterations and additions (renovations) fell 1.5. On an annualised basis, dwelling investment increased 1.7. Further strong growth is necessary if residential investment is to help offset weakening mining investment. There are signs however, that this will occur. Stronger building approvals data in recent months suggests that dwelling investment is set to pick up. Rising house prices and low interest rates would suggest that residential investment should gain some further traction. Household Consumption (chain volume measures, pa) Business Investment ( of Nominal GDP) Mar-9 Mar-9 Mar-9 Mar- Mar- Mar-1 Mar Business Investment Business investment and private investment data was distorted in the September quarter by the sale of the NSW assets Port Botany and Kembla from the public to the private sector that occurred in the June quarter. Abstracting from the sale (by excluding asset transfers), the net impact on growth was a net detraction of.1 percentage points from both public and private business investment. The pipeline of mineral and resource projects from the BREE (Bureau of Resource and Energy Economics) and data from the capex survey is suggesting that mining investment will decline in coming years, but at a gradual pace. It appears that business investment will plateau, rather than dropping sharply over the next year. Although this suggests that mining investment will not detract too heavily from growth, business investment will not likely add to growth either, unless non-mining investment starts to pick up. The level of investment remains very high and will remain so until projects currently underway are completed. The completion of projects should then lead increased production capacity and a lift in the volume of exports. 3

4 Data Snapshot Wednesday th December 13 - Trade Sector Net exports contributed.7 percentage points to growth in the September quarter. While the strong contribution was largely because imports fell 3.3 in the quarter, export volumes rose.3 in the September quarter. Export volumes have risen for six consecutive quarters, and lifted.1 in the year to the September quarter. The data indicates that the export phase of the mining boom is clearly underway. Net exports should continue to be a major driver of growth as production capacity for commodity exports continues to increase, and demand for capital imports declines. GDP Income Measure: Real GDP - using the income measure - also lifted by. in the September quarter and by.5 in the year to the September quarter. The income measure largely comprises wages and profits. Total wages (including employer s social contributions) rose. in the September quarter. Annual growth quickened pace from.3 in the June quarter to 3.3 in the September quarter but still remains relatively soft. Subdued labour market conditions are keeping a lid on wages. Slowing wage growth is also likely playing a part in the modest growth in household consumption, but it is only part of the story. 15 Household Savings Ratio (quarterly data, per cent) 1 Terms of Trade (ratio of export to import prices) Mar-9 Mar-9 Mar-9 Mar- Mar- Mar-1 Mar-1 Mar-9 Mar-95 Mar- Mar-5 Mar-1 Mar-15 - Gross Operating Surplus Profits (Gross operating surplus) for total corporations rose.7 in the September quarter, which took the annual rate up to 3. in the year to the September quarter. This was the strongest annual growth in 1½ years, but well down from the 1.1 annual growth recorded in September 1, when the rising terms of trade was boosting profit growth in mining. The fall in the Australian dollar, which could possibly fall further, will assist exporters in time and has helped boost commodity incomes for miners. Profits over all sectors (including government and dwellings owned by persons) grew by.9 in the September quarter and. in the year.

5 Data Snapshot Wednesday th December 13 - Terms of Trade The terms of trade (the ratio of export prices to import prices) fell by 3.3 in the September quarter, after a flat outcome in the June quarter. The rising terms of trade in past years had helped support incomes growth but the terms of trade is now falling and set to fall further as mining investment winds down. On a year ago, the terms of trade is 3.5 lower. While the terms of trade should continue to decline, we expect that it will average at a higher rate than in the past. It means that Australia s purchasing power will be relatively higher on a historical comparison. - GDP per Hour Worked (Productivity) With the terms of trade no longer expected to provide the same boost to growth in incomes as in the past, it has become more critical for the economy to record productivity gains in order for living standards to be maintained. GDP per hour worked in the market sector, which is one measure of productivity, was flat in the September quarter and grew at an annual pace of 1.5 in the year to the September quarter. Annual growth has been in positive territory for ten consecutive quarters, and follows very weak productivity growth in earlier years. But more improvements on productivity need to flow through. - Household Saving Ratio The household savings ratio rebounded to 11.1 in the September quarter, from 1. in the June quarter. This indicates that despite rising wages, households are still choosing to save more of their incomes rather than spend. The rising caution is despite lower interest rates, rising house prices which have boosted household wealth and a jump in consumer confidence over the quarter. The significant interest rate cuts from the RBA since November 11 have begun to impact economic activity and will continue to have a further impact for some time. As this occurs we expect householders to become somewhat less cautious in their approach to spending. State Final Demand (y/y as at September quarter 13) State Final Demand (q/q as at September quarter 13) NSW VIC QLD SA WA TAS NT ACT Aus -1 NSW VIC QLD SA WA TAS NT ACT Aus 5

6 Data Snapshot Wednesday th December 13 State Final Demand: In the year to the September quarter, growth remained strongest in the Northern Territory (7.). This was followed by the ACT (.3), Queensland (1.) and NSW (1.7), although these annual growth rates are well below their long-term trend. We saw softer growth in Victoria (.), SA (.7) and Tasmania (.5). Annual growth in State final demand for WA retreated into negative territory in the year to September quarter, with a decline of.. In the September quarter, State final demand was strongest in the ACT (1.7), followed by Tasmania and the NT (both up 1.1), Victoria (.5) and NSW (.). Queensland and WA just managed to show positive growth for the quarter (both up.1). State final demand in SA declined.5 in the September quarter. Industry Break Down: Industry Gross Value Added, Chain Volume Measures Quarterly By Industry Sector Change Annual Change Arts & Recreation Services 3.5. Other Services 3.3. Mining Transport, Postal & Warehousing Public Administration & Safety 1..7 Construction 1.1. Health Care & Social Assistance. 5. Financial & Insurance Services Education & Training..1 Ownership of Dwellings.. Retail Trade Information, Media & Telecommunications Professional, Scientific & Technical Services Rental, Hiring & Real Estate Services Manufacturing Administrative & Support Services Accommodation & Food Services Electricity, Gas, Water & Waste Services Agriculture Wholesale Trade

7 Data Snapshot Wednesday th December 13 Contact Listing Chief Economist Senior Economist Besa Deda Hans Kunnen () () 5 3 Senior Economist Economist Josephine Horton Janu Chan hortonj@bankofmelbourne.com.au chanj@bankofmelbourne.com.au () 53 9 () 53 9 The Detail The information contained in this report ( the Information ) is provided for, and is only to be used by, persons in Australia. The information may not comply with the laws of another jurisdiction. The Information is general in nature and does not take into account the particular investment objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the Information without first seeking expert financial advice. For persons with whom Bank of Melbourne has a contract to supply Information, the supply of the Information is made under that contract and Bank of Melbourne s agreed terms of supply apply. Bank of Melbourne does not represent or guarantee that the Information is accurate or free from errors or omissions and Bank of Melbourne disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Terms, conditions and any fees apply to Bank of Melbourne products and details are available. Bank of Melbourne or its officers, agents or employees (including persons involved in preparation of the Information) may have financial interests in the markets discussed in the Information. Bank of Melbourne owns copyright in the information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of Bank of Melbourne. Any unauthorized use or dissemination is prohibited. Neither Bank of Melbourne- A Division of Westpac Banking Corporation ABN AFSL 3371 ACL 3371, nor any of Westpac s subsidiaries or affiliates shall be liable for the message if altered, changed or falsified. 7