Daily Commentary BY THE CURVE TEAM –

Disappointing GDP Justifies RBA’s Concerns

8th of February, 2018

Growth for the fourth quarter missed estimates and confirmed a slowdown in growth over the back half of the year. While the RBA was expecting the slowdown, it is the composition of growth that justifies their concerns over the outlook.

The Australian economy grew by 0.4% in the fourth quarter, which saw the annual rate slow from an upwardly revised 2.9% in Q3 to 2.4% in Q4. Population growth continued to underpin GDP with growth per capita still sliding.

By the numbers, the biggest contributor to growth came from consumption, which bounced back from a weak Q3 while net exports provided the biggest drag. The concern is that the outlook for both these components couldn’t be more different.

The growth rate in the fourth quarter was just below the RBA’s forecasts. The RBA still expects growth to rise over the course of this year, largely on a recovery in commodity exports along with a pick LNG exports as new capacity comes online.

The big concern and something that the RBA continually highlights is the consumer. The current momentum in consumption in unlikely to be sustained unless we see wages pick up. Consumers to date have been able to supplement with weak wage growth by running down savings. The savings rate has now fallen 7.7% from its post GFC high to 2.7% at the end of 2017.

So for consumption to grow faster than wage growth, consumers either need to run savings down further, or increase debt. The former is unsustainable and the latter is something the RBA is already trying to address through the council of financial regulators due to already ballooning debt levels.

The headwinds facing consumers is likely to be one of the key drivers behind the shift in language around growth in Tuesday’s monetary policy statement. After expecting growth to rise to around 3.25% over the course of the year, growth is now expected to be faster than 2017 which was 2.4%.

We won’t know for sure what that means for the RBA forecasts until the next update in May.

For now though, yesterday’s data doesn’t have an immediate impact on the outlook for monetary policy. In fact, the market has pushed out expectations for the the first rate hike to May next year from February a month ago.

David Flanagan

Director - Interest Rate Markets