By Chris Zappone
- GDP growth weakest since December 2008
- Net exports biggest drag on the economy
- Dollar drops as rate rise prospects dim
- Growth expected to pick up in the next months
Update Australia’s economy grew 0.2 per cent in the September quarter, but the pace of economic expansion has slumped to its slowest since the depths of the global financial crisis at the end of 2008.
The September quarter growth rate was half the 0.4 per cent expected by economists, and compared with a revised 1.1 per cent growth in the June quarter.
"A disappointing outcome both with the quarter and the downward revisions,'' said Michael Blythe, chief economist at Commonwealth Bank. ''We're still churning out what's a decent rate of growth but it's not as solid as it had looked.’’
Annual growth now sits at 2.7 per cent, down from the 3.4 per cent tipped by economists, and slower than the revised 3.1 per cent annual pace reported for the June quarter.
Michael Pascoe: Who's right - the RBA or ABS?
Elizabeth Knight: Shift from sweet spot to soft spot
Economists: GDP growth slump 'just a blip'
Wayne Swan: Data shows economic resilience
The dollar dropped sharply on the news. Shortly before the release of the data from the Australian Bureau of Statistics, the Australian dollar was buying 96.07 US cents; within moments it had fallen to to 95.50 US cents before clawing back some of its losses.
Australia's economic recovery remains patchy. Improved crop conditions helped bolster the farming sector, which added 0.4 percentage points of growth for the September quarter. That gain, though, was countered by a drop in net exports lopping a similar amount from the quarter's growth rate.
The national accounts figures suggest the Reserve Bank will have little need to raise interest rates any time soon. Investors are betting the RBA will leave its key cash rate unchanged at 4.75 per cent when it meets next week. They are also rating the possibility of another interest rate in a year's time at an 80 per cent chance.
"It probably confirms the RBA is on hold for a while, but these figures are a little at odds with some of the other indicators like the labour market which has been very strong,'' said CBA's Mr Blythe. ''I think there's still a tightening bias there, but these figures...suggest there's no urgency to act."
Setback
Moody's Economy.com Matthew Circosta said the disappointing growth result was a temporary setback for Australia's overall growth trend.
"The upshot of the third quarter’s slower growth is that private demand is only slowly taking the reins away from the public sector to drive growth," he said. "That process should strengthen in coming quarters and boost growth."
"The exports outlook remains bright, with Chinese and Indian demand for resources lifting export growth in the year ahead. As the expansion picks up pace next year, the Reserve Bank of Australia will continue to tighten monetary policy," Mr Circosta said.
Household expenditure contributed 0.3 percentage points to the September growth figure, while both private and public investment added 0.1 percentage points.
Mixed bag for spending
Final demand - spending by the public and private sectors - increased 1.4 per cent in NSW in the quarter, seasonally adjusted, while it declined 0.1 per cent in Victoria.
Queensland and South Australia's final demand both dropped 0.5 per cent in the quarter. Western Australia's rose 0.4 per cent and Tasmania's jumped 1.1 per cent, the ABS said.
Output from agriculture, forestry and fishing grew by 18.5 per cent, seasonally adjusted, adding 0.4 percentage points to the quarter's growth, and standing out as the only industry to make a positive contribution to GDP growth in this quarter.
Labour factors
Australia's strong labour market is expected to shield the economy from a more drastic slowdown next year.
“We’ve been here before where we’ve seen situations of strong employment numbers and weak GDP,” said Westpac senior economist Justin Smirk.
The jobless rate in Australia also remained low in recent months, rising modestly to 5.4 per cent in October, from 5.1 per cent in September.
Historically, there is a strong link between low joblessness resulting in economic growth later, he said.
“The bottom line is, if employment says the economy is reasonably robust, then the GDP probably has question marks around it," Mr Smirk said, suggesting it could be upwardly revised in the future.
Surprise slowdown
In recent days, the ABS has released figures for key components of the economy. Economists calculated that the numbers pointed to a slowdown in growth although today's overall result was surprisingly weak.
The current account deficit, for instance, widened to $7.8 billion from $5.6 billion in the second quarter.
Inventories fell 0.8 per cent in the third quarter, following a 0.5 per cent drop in the second quarter, suggesting businesses aren’t planning on robust demand over the horizon. Construction work done also unexpectedly dropped 2.1 per cent in the quarter, from a 3.5 per cent increase in the previous quarter.
Australia’s terms of trade – the value of exports against the value of imports – have buoyed the economy in recent years, driven largely by huge Asian demand for the nation’s commodities, while the domestic sector enjoys inexpensive imports largely from the same region. The ABS today said the terms of trade rose a further 0.8 per cent in the September quarter.
“To put it in very simplified terms, five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets,” RBA governor Glenn Stevens said last month.
“Today it is worth about 22,000 flat-screen TV sets – partly due to TV prices falling but more due to the price of iron ore rising by a factor of six.”
The International Monetary Fund estimated last month that emerging Asia accounted for one quarter of Australia’s inflation adjusted GDP growth over the past decade.
While Australia’s economy has outperformed most of the rich world since the start of the global financial crisis in 2008, other countries are now putting in comparable performances. Third-quarter growth in the US, for instance, was 3.2 per cent and Canada's came in at 3.5 per cent in Canada.
Europe, though, is faring less well even before the latest debt woes, with third-quarter growth of 1.9 per cent in the eurozone and 2.8 per cent in the UK.
czappone@fairfax.com.au
BusinessDay with Reuters