Monthly economic e-news – April 2019

05 April 2019

By Craig Turnbull  
Chief Investment Officer


What is the latest GDP growth figure telling us about the economy?

The February corporate reporting season revealed how some of our larger companies are travelling but the latest GDP figures from the Australian Bureau of Statistics (ABS) provide some insights into the health of the wider economy.

After a very modest 0.2% rise in the December quarter, the seasonally-adjusted annual GDP growth fell back to just 2.3%, well below the Federal Treasury and the Reserve Bank’s current forecasts of around 3% annual growth.

 

Source: ABS, Trading Economics  

What factors are influencing Australia’s economic growth?

The latest seasonally-adjusted figures from the ABS reveal that government expenditure and investment have been driving much of our economic growth but this has been undercut by a downturn in construction and agricultural production.

Government expenditure was up 5.6% for the year to December mainly due to increased spending on disability, health and aged care services.

Large public infrastructure projects being undertaken by state and local governments across the country helped to drive fixed capital government investment up 2.7% in the quarter, and 9% for the year to December.

This was in contrast to the 3.7% fall in commercial construction for the year to December mainly due to a number of large mining projects nearing completion and a slowdown in the construction of private dwellings.

On the production side, the drought had a significant impact on livestock and winter crops across the eastern states in 2018 reducing the annual agriculture, forestry and fishing production by 5.9% and this in turn flowed through to a 1.9% drop in food manufacturing.

But the final GDP figure did receive a small boost with a 2% rise in household expenditure on the back of increased spending on health, clothing and footwear.

But is the Australian economy in such bad shape?

Some economists are questioning whether the latest GDP figures are an accurate reflection of our current economic health.

It’s true that GDP growth has been slowing, particularly over the second half of 2018, but the employment data tells a different story. In February, our seasonally-adjusted national unemployment rate was 4.9%, and just 4.3% in NSW.

In the first two months of this year, our workforce expanded rapidly, adding more than 29,000 new full-time jobs and over 16,000 new part-time positions.

So why are our GDP growth figures so weak when we have some of the strongest employment data in years?

Some economists argue that the employment data is a better indicator of where the economy is heading, pointing to problems in the way the ABS measures the three key elements of the GDP figure; expenditure, production and income.

Others claim that simultaneous high employment and soft GDP numbers are simply symptoms of our poor productivity, and that’s the real reason we’ve been experiencing low wage growth in Australia.

So there are definitely some mixed signals when it comes to the local economy.

What does this mean for investors?

The uncertain economic outlook here and internationally has seen many investors shift to less risky assets in recent months with the yield on Australian 10-year government bonds falling below 2% in March.

Softer GDP growth figures have sparked speculation that the Reserve Bank may cut the official cash rate below 1.5% and this will have an impact on investment returns for cash and term deposits.

So if you think you may need to review your investment strategy, now might be a good time to have a chat with your financial planner.

 

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Markets at a glance

for the month ending 31 March 2019

Australian shares 1 up by 0.07%
Australian Government Bonds yield2 down to 1.775%
Australian dollar down to US$0.7087 
noArrow Cash ratesteady at 1.50%
upArrow International shares4 up by 1.08%

 

1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)

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