Monthly economic e-news – December 2018
17 December 2018
By Craig Turnbull
Chief Investment Officer
What are the latest GDP figures telling us?
International issues have dominated the economic headlines over the last twelve months; the escalating trade war between the US and China, fears of rising global inflation, and of course, the uncertainty of the Brexit negotiations.
But closer to home, the economy has been picking up with the annual GDP growth rate topping 3% in June despite a downturn in the residential property market. However, the Australian Bureau of Statistics (ABS) reported a more subdued September quarter, creating some doubts about the outlook for 2019.
Source: Trading Economics, ABS
What dampened our GDP growth rate in the last quarter?
Australia has been experiencing a mini-resources boom over the last twelve months with the construction of new large scale projects and strong commodity prices driving up our annual GDP growth rate.
However, the fall in mining production in the September quarter has reversed this trend and it had implications for the construction and manufacturing sectors.
Planned maintenance at a number of large facilities reduced the production of coal by 6.1% and iron ore by 0.3% over the quarter but this was partially offset by continuing high levels of liquid natural gas (LNG) production.
Heavy construction fell 4.5% along with construction services, down 1.9%, as work on a number of large mining and solar energy projects neared completion. The slowdown in construction contributed to the 0.7% cut in manufacturing output due to a decline in the demand for building materials.
The next six to twelve months will see a number of new projects come online and this is expected to boost production but the impact on the GDP figure will depend largely on continuing strong demand for our key mining and energy exports.
What parts of the economy are still growing?
Despite the slowdown in resources, there were still some sectors of the economy that continued to grow over the September quarter.
Government expenditure made a strong contribution, increasing by 0.5% and boosting the annual increase to 4.8% with significant spending on health, aged care and disability services.
Government investment surged 3.4% over the quarter as result of numerous large scale infrastructure projects, particularly in NSW, and this lifted the annual increase in public investment to 3.8%.
Net exports also made a positive contribution in the three months to September but this was mainly due to a sharp drop in imports. Actual exports remained flat with a small rise in goods and services offsetting a 4.5% fall in iron ore exports, but the net figure was boosted by a 2.2% decline in the import of capital goods and 2.5% decrease in household imports.
Household consumption has been one of the key contributors to GDP growth over the last twelve months but after a strong lift of 0.7% in June, the modest 0.3% increase in the September quarter was below expectations.
The ABS also revealed that Australians are continuing to dip into their savings to maintain their spending with the household savings ratio falling to just 2.4% in the September quarter.
So what does this mean for the Australian economy?
In November, the Reserve Bank predicted a GDP growth rate of 3.5% for 2018 but that now seems overly optimistic and many analysts are expecting the RBA to substantially revise its forecast down to around 3% for the year.
As always, much will depend on mining and resources exports and whether the September quarter was just a blip or is it signaling the end of the mini-resources boom of the past twelve months.
We’ll know more when the ABS announces the December quarter GDP figures in early March, but in the meantime, have a great Christmas and a happy new year.
Markets at a glance
for the month ending 30 November 2018
Australian shares 1 down by 2.21%
Australian Government Bonds yield2 down to 2.585%
Australian dollar up to US$0.7316
Cash rate3 steady at 1.50%
International shares4 up by 0.98%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)