Daily Commentary BY THE CURVE TEAM –

GDP Fits with RBA Narrative

7th of December, 2017

Growth for the third quarter released yesterday slightly undershot expectations. However it was the composition of growth rather than the level of growth that stoked concerns around the outlook.

The ABS released Australia’s latest growth numbers yesterday with the economy growing 0.6% in the third quarter, just shy of the 0.8% expected. The undershoot implies that the annual rate only reached 2.8%, 0.2% shy of the 3% the market and what the RBA forecasts were expecting.

It was the composition of growth that had the market talking rather than the slight undershoot as the weakness emanating from the consumer sector overshadowed the lift in business and government investment.

It should have come at no surprise that domestic demand was going to be weak after a run of weak retail sales outcomes over the past few months. It is also something that the RBA has repeatedly warned about in its monthly monetary policy statements. What got the hand wringers really wound up was the fact that not only was household consumption only up 0.1%, the weakest since 2008, but the savings rate also lifted.

The overall GDP result actually dovetailed nicely with the RBA’s evolving narrative that I highlighted yesterday. Business and government investment did the heavy lifting as far as the overall growth figures are concerned. This is something that RBA has long anticipated and expected to continue over the period ahead.

In turn, this persistent uplift in business and government investment is expected to underpin employment growth which should in turn help the wages situation. If this is to occur, then it should help alleviate the risks to consumption.

The key question for monetary policy over the year ahead is which of the above trends becomes the dominate one? Will the forward momentum from business and government investment drive enough employment growth to stoke wages and turnaround the weakness in consumer spending? Or will the consumer retrenchment gather steam and put the overall economic outlook under pressure?

I will delve deeper into this question in next weeks Curve Monthly Insights.

David Flanagan

Director - Interest Rate Markets