Australia’s GDP for the September 2016 quarter was released with the results far lower than -0.1% expectations, falling to -0.5%
The good news is that GDP is a lousy measure of economic growth. The bad news is that when GDP reinforces other accurate measures such as employment or inflation, there is generally an underlying reason for the consistency.
In Australia’s case, we see this as the lack of an economic engine to replace the mining investment boom. In 2013 and 2014, construction filled the void, but started to wane in 2015 and was much worse this year. Education and tourism have picked up some of the slack, but are smaller industries and haven’t filled the gap.
“Taxes, less subsidies” (mostly GST and import tariffs) have jumped as driver of GDP growth over the past year, without any obvious reason. This category has contributed 0.28% of Australia’s total 2.19% growth rate, more than any other sector other than financial services.
Financial services is the brightest part of our economy at present. The chart below shows which sectors of the economy have outperformed and which have underperformed. Relative to its average contribution of 0.33%, financial services is currently contributed 0.45% of Australia’s total 2.19% growth rate. Taxes follow at 0.28%pa, then heatlh care at 0.26%pa, mining at 0.24%pa, government spending at 0.22%pa, and professional services at 0.20%pa. Source: ABS
At the other end of the spectrum, construction shrunk over the past year, so its contribution is negative at -0.19%. Manufacturing also shrank, contributing -0.12%pa.
What is more important with GDP is to look for reliable trends. Manufacturing has been reliably negative since the GFC, trending downwards as the investment phase ends, but will be positive as the extraction phase ramps up.
Retail trade is contributing less than usual, although is likely an anomaly given strong retail sales figures we’ve seen so far this quarter. Wholesale trade was ahead of normal levels, likely the flipside of the retail anomaly.
The real worry at the moment is construction, which contributes an average of 0.28%pa but is down to -0.19%pa in the past year, a hit to Australia’s overall growth of 0.47%pa. With residential construction in Brisbane and Melbourne slowing sharply, and Perth in a deep recession, the outlook isn’t great. Record low wage growth in the construction sector reinforces this weak outlook.
We’ll find out more about what the December quarter holds, but based on the current data, there are more downward shocks ahead for Australia – pointing to lower rates and a lower Australian dollar in 2017.