Australian Q3 GDP: A shock, but some weakness is temporary - ANZ

The 0.5% q/q drop in Australia’s Q3 GDP is a shockingly weak result as there has undoubtedly been some loss of momentum in the economy, but there are a number of temporary elements to the weakness, suggests Felicity Emmett, Head of Australian Economics at ANZ.

Key Quotes

“We expect a bounce in activity in Q4. While inflation measures in today’s report generally remain low, the economy-wide measure of wages rose quite sharply. In aggregate, a mixed bag of numbers, but we expect they will keep the RBA’s easing bias intact.

• GDP declined by 0.5% q/q in Q3 to bring annual growth down to 1.8% from a downwardly revised 3.1% in Q2 (previously 3.3%), weaker than our and the market’s forecasts for a decline of 0.1% q/q. The RBA does not publish quarterly forecasts, but its six monthly forecasts suggest an expectation of annual growth of close to 3% in Q3.
• While the recent data pointed to a low outcome, the degree of weakness in today’s report is surprising. For us, the surprise has come from particular weakness in the income measure of GDP (-0.7% q/q) with small business profits down particularly sharply, as well as broad-based weakness in the production measure of GDP. 
• We expect that today’s numbers overstate the underlying weakness in the economy. To a large degree the weak result represents a confluence of downside surprises, some of which will be reversed in Q3. Housing is likely to rebound given the amount of work in the pipeline, resources exports should grow strongly given ongoing expansion in LNG supply, and profits growth should pick up supported by higher commodity prices and a bounce back in small business profits. Moreover, consumer spending (which accounts for around 55% of GDP) looks likely to pick up given the acceleration in retail sales over the past couple of months.
• Overall though, the report does suggest some loss of momentum in the economy, consistent with the slowdown in employment growth. Total business investment remains particularly weak, with mining investment continuing to be a substantial drag, housing construction is clearly at or close to a peak, and growth in consumer spending has slowed sharply from the rates seen late last year and early this year.
• For policy, the RBA is likely to be disappointed by the apparent loss of momentum in the economy, but yesterday’s post-meeting media release suggested that it also believes some of the weakness to be temporary. The tickup in the economy wide measure of wages and unit labour costs in today’s report is encouraging, but the core household consumption deflator remains particularly weak. In aggregate, we expect that the Bank’s easing bias is likely to be retained for some time yet despite recent market enthusiasm for rate hikes.”