WEEKEND ECONOMIST: Uneven moderate growth
With the national accounts due out on Wednesday, Westpac expects Q4 GDP growth will be bolstered by the mining sector, but tips conditions in the labour intensive industries to be subdued.
The period of sustained sub-trend growth is now four years. Growth was just 1.2 per cent through 2008, 2.8 per cent through 2009 and 2.4 per cent through 2010. Moreover, the growth divide between sectors and states became more pronounced during 2011.
From quarter to quarter, growth has been volatile. We suspect domestic demand was broadly flat in Q4. This follows a 2.1 per cent jump in Q3, inflated by a spike in infrastructure activity (which incorporated the importation of a large one-off structure). We expect business investment to decline, following a surge last quarter, consumer spending growth to slow and dwelling construction to contract, offsetting a modest gain in Q3.
A potential plus for Q4 is a possible small bounce in public demand following a sharp contraction. Also boosting Q4 GDP is a turnaround of net exports and business inventories, from -1.7 percentage points (ppts) for Q3 to a forecast 0.8ppts. However, we stress that there is a greater degree of uncertainty surrounding forecasts of inventories, which are notoriously volatile and generally revised.
Much focus will be on the headline GDP growth number and how this sits relative to trend, which is judged to be around 3.25 per cent.
However, the growth debate is far more complex than this. Our analysis highlights that growth is currently less job intensive, with the strength concentrated in the mining sector, while conditions in the labour intensive sectors, for example, retail, are subdued.
Over the year ahead, Australia is likely to outperform most advanced economies, boosted by the mining investment boom. However, 2012 will also be challenging. Structural change is underway as many firms are forced to reassess their business model given the high Australian dollar. Moreover, the global economy remains fragile and the outlook uncertain, notwithstanding some positives of late.
Domestic demand: flat end to 2011
We expect demand to be flat for the December quarter, an outcome that would see annual growth at around 3.8 per cent. Private demand is considerably stronger than this, expanding over the year by a forecast 5.3 per cent, boosted by double digit business investment growth.
Household consumption (0.7 per cent): Consumer spending reportedly expanded by a surprisingly strong 1.2 per cent during the September quarter. We anticipate some slowing, forecasting a rise of 0.7 per cent. This would be enough to hold annual growth at 3.8 per cent.
There has been a marked shift in consumer spending patterns. Retail sales are subdued. This was again the case in Q4, with sales expanding by 0.4 per cent, following a rise of 0.5 per cent. Motor vehicle sales are also patchy, despite the plus of a stronger currency. Interest rates, households desire to pay down debt and labour market weakness were all negatives in 2011. Vehicle sales increased by around 0.5 per cent in Q4, following a seven per cent rise in Q3 – which was a catch-up after the supply disruptions over the first half of the year.
Dwelling construction (-2.3 per cent): Housing construction has been relatively weak since late 2010 in the face of higher interest rates and weak labour market conditions. The September quarter was the exception, with activity rising 0.9 per cent. Weakness quickly returned, with published data reporting new work declining by 1.3 per cent in Q4 and renovation work falling by 3.6 per cent. This would see overall dwelling construction declining by around three per cent through 2011.
New business investment (-3.5 per cent): Business investment spending is expanding at a double-digit pace as the mining investment boom gathers momentum. The December quarter will see some pay-back, with a forecast decline of 3.5 per cent, following a 12.7 per cent jump in Q3. This would see annual growth at around 14 per cent, a marked improvement from a flat result through 2010.
Published data reveals that: infrastructure activity fell by 6.8 per cent following a 35 per cent rise in Q3; non-residential building work declined by 9.3 per cent thereby reversing a 10.6 per cent rise in Q3; and that equipment spending moderated, declining by 2.1 per cent following a particularly strong 7.6 per cent rise in Q3 .
Public demand (0.7 per cent): We're forecasting a small bounce in public demand, up 0.7 per cent, following a sharp 2.6 per cent contraction in Q3. Over the last year, the public sector was a headwind to growth. The federal government's fiscal stimulus package is being unwound and state governments are feeling the squeeze from weak revenue growth. All up, public demand is forecast to contract by around 1.5 per cent through 2011, with investment declining from elevated levels by around nine per cent. Consumption growth is likely to be just one per cent through the year, moderating from three per cent through 2010, as governments cap public servant numbers.
Net exports: a small positive
We're forecasting net exports to be positive – albeit only just, at 0.1ppt. This would be a turnaround from a 0.6ppt subtraction for Q3 and would be the first positive contribution since March 2009. Export volumes have been disappointing, constrained by the headwind of the high Australian dollar. Volumes are forecast to rise by two per cent, boosted in part by the gradual recovery of coal shipments following the January floods. Such an outcome would see exports unchanged on a year-ago.
Imports are advancing at a double digit pace. Notably, the mining investment boom is relatively import intensive and the high dollar is encouraging a switch towards imported goods and services. For the December quarter, we're forecasting imports to rise by a touch over one per cent, to be around 12 per cent higher over the year.
Business inventories: sizeable boost
The inventory contribution to quarterly GDP growth has tended to alternate between positive and negative since the start of 2010 as firms contend with heightened global uncertainty and disruptions from the severe weather events of early 2011. This pattern most likely extended into Q4. Inventory levels are forecast to rebound by 0.7 per cent in Q4 and add 0.7ppt to growth, following a 1.2 per cent decline in Q3, which subtracted 1.1ppts from growth.
Andrew Hanlan is a Westpac senior economist.
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