Australian GDP for the June quarter was just 0.2%, well short of the 0.5% expected by markets and short of our expectations of 0.3%-0.4%
The facts
The Australian GDP released for the June quarter was 0.3% short of market expectations at 0.2%. Our expectation was in the range of 0.3% to 0.4%. It is the lowest quarterly growth figure since March quarter 2011, and the worst annual GDP figure, before adjusting for inflation, since 1961/62. The AUD responded by falling below 70c briefly before bouncing back slightly to be at 70.16c at the time of writing. The ASX is off another 1% and bond yields were off very slightly at the 10 year end of the curve.
Behind the facts
The mark-up of the GDP figure is even more concerning. It’s hard to find any good news in the mix at all.
Government expenditure contributed 0.6% growth to the GDP growth figure. So, without the government’s increased spending, GDP would have fallen. Government spending grew at 2.2% for the quarter, with both “fixed capital” (for example, infrastructure) and government consumption growing strongly. Spending on infrastructure is positive news for the economy, if sustained, but this is always at the mercy of political cycles. Government consumption spending is always temporary and unlikely to be sustainable when fiscal surpluses targets are at the centre of both political parties’ policy agendas.
Exports reduced GDP growth by 0.7%, which was predictable after the very strong growth last quarter and disruption in Queensland’s coal ports during this quarter. A lot of the headlines are blaming exports for the poor overall result, but the fact is that this result was factored in to the market’s expectations. It was the private sector domestic spending and investment that was disappointing.
The remaining two major contributors: household consumption and business investment continue to disappoint. Confidence for both these sectors remains low and lacks any catalyst for rebounding; if anything, it will be worse in the third quarter due to the ASX market correction and the growing concerns regarding China’s economy. If the housing market does in fact start to slow and the stockmarket continues to fall, consumer confidence will slide further. There is some growing risk that Australia will see a recession in 2015/16, but there will be a large pickup in economic activity from LNG (liquefied natural gas) projects hitting full production in 2016. So the more relevant outlook for investors, say beyond the next 12 months, is for a two-speed economy in which resource exports maintain reasonable GDP growth, but non-resource sectors and consumer spending experience very low growth. As interest rates drive consumer spending and business investment, not export activity, the RBA will be compelled to keep interest rates at historically low levels in this environment.
Long duration bonds did not react much to the GDP results, suggesting that the make-up of the GDP figures has not been fully factored in yet, i.e. that the sectors of the economy we need to see grow, aren’t yet growing.