Economic conditions uneven and choppy from quarter to quarter: Westpac's Bill Evans

GDP grew by 0.9%qtr in Q3, broadly as anticipated (market median 0.8% and Westpac 0.9%).

Annual growth rebounded to 2.5%, which was a little firmer than expected (market 2.4% and Westpac 2.3%). 

Economic conditions remain uneven and choppy from quarter to quarter.

In Q3, exports (resources and services) were once again the key growth engine, business investment and public investment were major negatives, housing is responding to low interest rates and consumer spending strengthened a little on firmer wage income numbers. The global backdrop and the income environment remain challenging, with the terms of trade down a further -2.3%qtr, -10.4%yr in the quarter. 

The details

Net exports contributed 1.5ppts to Q3 growth, more than reversing a surprise 0.8ppts subtraction in Q2.

Exports are a key growth engine, +4.6%qtr, as the mining boom pays dividend and as service exports (education, travel and business services) advance, boosted by the lower AUD.

Also, imports contracted in Q3, -2.4%qtr, including a sizeable fall in service imports as the lower AUD dollar bites, encouraging Australians to redirect spending from overseas to domestically – particularly travel, as well as retail. 

New business investment contracted by a sizeable -4.6%qtr, -11.0%yr.

The mining investment downturn is a sizeable headwind and will remain so into 2016. In addition, non-mining investment weakened in the quarter, with declines in equipment spending and non-residential building. 

Public demand, having surprised with a 2.2% jump in Q2, reversed, down 0.9% in Q3, including a hefty 8.2% drop in investment.

Going forward, public demand is unlikely to be strong, but a rebound from this sizeable fall is in prospect. Of note, NSW and Victorian state governments are embarking on new transport infrastructure projects. 

Household consumption provided a positive surprise, strengthening a little to grow by 0.7% in Q3, following a 0.6% rise in Q2 (revised up from 0.5%). Annual growth grinded higher to 2.7%, up from 2.5%.

Wage incomes were a little more supportive in the quarter, up 1.1%qtr, reflective of stronger employment results. In addition, households allowed their saving rate to shift a little lower, to a still high 9.0% from 9.4%. 

Home building activity grew by 0.9%, with new dwelling construction up a solid 2.0%qtr and a strong 12.8%yr in response to record low interest rates and pent-up demand. However, renovation work slipped, down 0.9%qtr, following a 2.4% rise. 

Domestic demand contracted by a sizeable 0.5%qtr in Q3, the largest decline since early 2009, reflective of the weakness of business investment and public investment in the period. Over the year, domestic demand grew by 0.8%. 

Across the three estimates of GDP

The expenditure measure printed at 0.9%qtr, 1.9%yr

GDP Income was 1.1%qtr, 3.1%yr

GDP Production was 0.8%qtr, 2.6%yr  

Implications for Monetary Policy

The Reserve bank will be encouraged by this report. Recall that at this time last year the September 2014 report printed 0.3% compared to the current print of 0.9% with through the year growth slipping a little to 2.7%. 

This time through the year growth has lifted from 1.9% to 2.5%. In particular household spending has printed 0.7% compared with a disappointing 0.5% last year and growth in annual household spending has been boosted from 2.5% to 2.7%. A modest fall in the savings rate from 9.4% to 9.0% also points to consumers being prepared to supplement modest income growth to lift the pace of spending. 

The Bank will also find the large contribution to growth from net exports provides some encouragement from an employment perspective with net services exports playing a more prominent role than a year ago. 

While last year Westpac interpreted the September quarter national accounts as providing a key justification for its forecast of a February rate cut we see no comparable case here. While markets held a 25% chance of a move in February we expect that as they have time to digest this result those folks favouring another move will be forced to push the timing out to May. 

For our part we remain comfortable with our call that rates will remain on hold in 2016 with downside risks. 

Strategy

For the AUD

AUD/USD approached the GDP data at 0.7325, consolidating its gains in NY trade. The 0.9% headline was a touch above consensus, producing an AUD/USD bounce to a high of 0.7345. This was a fresh high since 15 October. However, within 20 minutes the Aussie was back to 0.7315/20. Given that the details of the report were mostly encouraging and that RBA governor Stevens (speaking in Perth) deemed the data “not a bad outcome” and a touch higher than the RBA had expected, the AUD pullback suggests some fatigue after its sharp rally.

Bill Evans is chief economist of Westpac.