GDP Stuck in a Rut? Wednesday 4 th September Data Snapshot Wednesday 4 th September 2013

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1 Data Snapshot Wednesday th September 13 Wednesday th September 13 GDP Stuck in a Rut? Real GDP grew a modest.% in the June quarter, taking the Australian economy into a record years of consecutive annual growth. The annual rate of GDP growth edged up to.% in the year to the June quarter, leaving the economy stuck in a pattern of sub-par growth. Today s data gives us little comfort that the economy is transitioning smoothly from an economy driven by mining investment, to an economy driven by other sectors. Household consumption and non-mining investment are not doing enough heavy lifting yet, leaving underlying private spending soft. Across States and Territories, growth was patchy. Final demand was strongest in the Northern Territory, growing.5% in the June quarter, although Western Australia State final demand provided the largest contribution to growth, and posted quarterly growth of 1.3%. The household savings ratio lifted to its highest in nearly two years in the June quarter. It shows households are still choosing to save more of their incomes rather than spend. The soft pace of consumption growth appears to be not only due to slowing wage growth, but the ongoing unwillingness of consumers to spend. We continue to expect the RBA will need to cut official interest rates again this year, with November the most likely timing for a rate cut. % Gross Domestic Product % % Domestic Demand 1 % 1 Y/Y Y/Y - Q/Q - - Q/Q

2 Data Snapshot Wednesday th September 13 GDP Expenditure Measure: The GDP data continues to point to an economy that is stuck in a pattern of below-trend growth. Further, it doesn t give us comfort that the economy is transitioning smoothly from an economy driving by mining investment to one that isn t. Household consumption and non-mining investment are not doing enough heavy lifting yet. Domestic demand is subdued; it grew by only.% in the year, the slowest annual growth rate since Q3 in 9 when the economy was still dealing with the GFC. Moreover, underlying private spending rose by only.1% in the quarter. Real GDP grew by.% in the June quarter in seasonally adjusted terms. The annual growth rate edged up from.5% to.%, but remains well below the long-run or trend rate. Growth was patchy across areas and States and territories. Examining the data in a few different lights still leaves us with a picture of softness. If we look at trend data (which smoothes out the data further), real GDP rose by.5% in the June quarter. We have to go back ½ years to find a time when GDP expanded by less than this pace. If we look at GDP in nominal terms, the economy remains soft. Nominal GDP rose by.5% in the financial year of 1-13, which is the weakest since the 199s recession. On a more positive note, however, Australia has now posted its nd consecutive year of annual economic growth, the longest economic expansion in the nation's history, with the last recession having ended in Selected Expenditure Items on GDP, Chain Volume Measures Quarterly % Change Household Consumption. Dwelling Investment -. Business Investment (excluding asset transfers) -1.3 Public Spending (excluding asset transfers) 1. Contribution to GDP ppt Inventories. Net Exports. - Household Consumption Spending by households rose by.% in the June quarter and by 1.% over the year, despite 5bp worth of rate cuts that have fed through the economy since November 11. Households remain reticent about spending and this reticence is reflected in the household spending figures and also the lift in the household savings ratio. It also means that it will be hard for the non-mining sector to fill the gap that mining investment will leave if households do not do more of the heavy lifting in coming quarters. Consumers are also being selective about where they spend their dollars. Within household

3 Data Snapshot Wednesday th September 13 consumption, nearly all of the discretionary areas of retail spending fell in the quarter. These included spending on clothing & footwear (down.1% in the quarter), recreation & culture (down 1.% in the quarter) and hotels, cafes & restaurants (down.1% in the quarter). Spending on furnishings & household equipment also rose by.7% and it likely reflects the upswing underway in housing. Spending on motor vehicles was strong in the quarter, but changes to the FBT in July means that the September quarter sales are likely to have come undone. - Dwelling Investment Dwelling investment in new residential homes fell by.1% in the June quarter, after four consecutive quarters of growth. Despite the fall in dwelling investment in the quarter, annual growth remains robust at.5%. This is one area in the non-mining part of the economy that is coming to the party in helping to do some heavy lifting. Dwelling investment should resume its upward trajectory in coming quarters. - Business Investment The sale of the NSW assets Port Botany and Kembla from the public to the private sector distorted the business investment figures and public investment figures, although the net impact on growth was neutral. Business investment excluding the asset transfers fell 1.3% in the June quarter, detracting. percentage points from GDP growth in the quarter. The outlook for business investment is clouded with an investment slowdown expected in the resource sector over the next 1 months. However, 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. - Trade Sector Net exports were flat in the June quarter. Total export growth in Q of 1.3% was matched by a 1.% rise in imports. The third phase of the mining boom was evident in the data. Resources export volumes rose by 1.% in the June quarter and by 1.3% in the year to the June quarter. Household Consumption (chain volume measures, % pa) Business Investment (% of Nominal GDP) Mar-9 Mar-9 Mar-9 Mar- Mar- Mar-1 Mar

4 Data Snapshot Wednesday th September 13 GDP Income Measure: Real GDP on the income measure alone rose.% in the June quarter, which largely comprises of wages and profits. Total wages (including employer s social contributions) rose 1.% in the June quarter, following a subdued.1% increase in the March quarter. Annual growth edged up from.5% to.% in the year to June quarter but remains down on average annual growth of.% in 1. Subdued labour market conditions are keeping a lid on wages. Slowing wage growth is likely playing a part in the modest growth in household consumption, but it is only part of the story (see Household Savings Ratio). 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.5% in the June quarter, which took the annual rate up to.% in the year to the June quarter. This was the strongest annual growth in over a year, but well down from the 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.7% in the June quarter and 3.1% in the year. - Terms of Trade The terms of trade (the ratio of export prices to import prices) edged up.1% in the June quarter, after rising 3.1% in Q1. This result has helped support incomes in the quarter. For the year to the June quarter, the terms of trade are down.9%. Although the terms of trade are expected to decline in coming quarters, we expect that the terms of trade will remain high by historical comparison, which implies that Australia s purchasing power will remain relatively strong.

5 Data Snapshot Wednesday th September 13 - 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, productivity gains have been necessary for income growth to be sustained. GDP per hour worked, which is one measure of productivity has grown for six consecutive quarters, and grew at an annual pace of 1.% in the year to the June quarter. Annual growth has been in positive territory for nine consecutive quarters, and follows very weak productivity growth in earlier years. It is encouraging to see some improvement in productivity, which helps underpin economic growth. - Household Saving Ratio The household savings ratio lifted from 1.5% to 1.% in the June quarter, and is now at its highest in nearly two years. It suggests that households are still choosing to save more of their incomes rather than spend. The soft pace of consumption growth appears not only due to slowing wage growth, but the ongoing unwillingness of consumers to spend. The rising caution is despite lower interest rates and rising house prices which have boosted household wealth. However, a lift in consumer sentiment since the June quarter, another rate cut from the RBA in August and a lift in uncertainty post the Federal election might see consumers relinquishing some of their caution in the second half of 13. State Final Demand: State Final Demand (y/y% as at June quarter 13) State Final Demand (q/q% as at June quarter 13) - - NSW VIC QLD SA WA TAS NT ACT Aus - NSW VIC QLD SA WA TAS NT ACT Aus In the year to the June quarter, growth remained strongest in the Northern Territory (.%). This was followed by Queensland (1.%) and NSW (1.3%), although these annual growth rates are well below their long-term trend, and Victorian final demand little changed (.1%) in the year to the June quarter. Of more concern is the narrow base of growth across the States and territories in the year to the June quarter, with WA (-1.%), ACT (-1.1%), SA (-1.%) and Tasmania (-.5%) all recording a contraction in State final demand over the year. For growth in the June quarter, growth was also patchy across the States and territories. Growth in 5

6 Data Snapshot Wednesday th September 13 Western Australia rose 1.3%, making the largest contribution to GDP growth (. percentage points) of all the States and territories. Private investment in Western Australia rose.3% in the June quarter, although this failed to reverse the large declines of the previous two quarters. Industry Break Down: Industry Gross Value Added, Chain Volume Measures Quarterly % By Industry Sector Change Annual % Change Information, Media & Telecommunications.. Administrative & Support Services..5 Financial & Insurance Services Arts & Recreation Services Agriculture Construction 1.9. Wholesale Trade Health Care & Social Assistance Accommodation & Food Services.9.3 Public Administration & Safety. 5. Education & Training.7. Mining..1 Ownership of Dwellings.. Other Services. -.9 Manufacturing.1. Retail Trade..3 Rental, Hiring & Real Estate Services..3 Professional, Scientific & Technical Services..1 Electricity, Gas, Water & Waste Services Transport, Postal & Warehousing

7 Data Snapshot Wednesday th September 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 I nformation. 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