GDP falls 0.5pc in September quarter, rises 1.8pc over the year

Australia’s economy has posted its first negative growth reading in over five years but analysts don’t expect a recession.

A construction worker on an apartment building site in Sydney. Pic: Bloomberg

The Australian dollar has slumped after third quarter growth data came in well shy of market expectations, with the first negative reading in more than five years.

Official figures released by the ABS showed a 0.5 per cent contraction in seasonally-adjusted GDP growth for the September quarter, dragging the yearly growth number down to 1.8 per cent.

The readings are well shy of analyst projections for a 0.1 per cent dip and a rolling 12-month growth figure of 2.2 per cent.

It follows on the heels of an upwardly revised quarterly growth reading of 0.6 per cent in the June quarter, although the yearly growth rate to June 30 was revised down to 3.1 per cent. It had previously been reported as a four-year high of 3.3 per cent.

At 1.10pm (AEDT), the Australian dollar traded at US74.24c, down from US74.69c just prior to the release.

However, the local sharemarket was largely unmoved, holding onto gains of 0.5 per cent.

The red quarter is the first since the Queensland floods-affected March quarter of 2011.

It leaves Australia at risk of its first recession — defined as a period of two straight negative readings on growth — in 25 years when fourth quarter numbers are revealed in February.

However, analysts widely expect a recession to be dodged, in part due to the recent rally in commodity prices.

“Although the Australian economy contracted in the third quarter, this is very unlikely to be the start of a recession as GDP will most probably rebound in the fourth quarter,” said Capital Economics chief Australian economist Paul Dales.

“The 0.5 per cent month-on-month rebound in retail sales in October suggests that the fourth quarter got off to a good start and a possible 12 per cent leap in the terms of trade in the fourth quarter will boost incomes too.

“Nonetheless, this is only the fourth fall in GDP in 25 years, which highlights that the economic backdrop is not consistent with a big rise in underlying inflation.”

Mr Dales said the data solidified his view rates could drop from 1.5 per cent to 1 per cent next year, with the Australian dollar at risk of a fall below US70c.

Futures markets are now showing the chance of a rate cut next year as around one-in-four, up from 20 per cent yesterday, while the chances of a rate hike are now seen negligible.

Through the third quarter the primary drags on growth were government capital expenditure – which subtracted 0.5 percentage points – and private investment in new buildings – which reduced the overall figure by 0.3 percentage points.

“Driving investment is the challenge,” Treasurer Scott Morrison said in response to the data.

“We’ve had 12 consecutive quarters of contraction in private investment. If you compare this to (the struggles of) 2008 the big difference is business investment.”

New engineering and new and used dwellings subtracted 0.2 and 0.1 percentage points, respectively, while net exports trimmed the number by 0.2 percentage points.

“The reduced building activity is reflected in the output of the construction industry which fell 3.6 per cent for the quarter and was the largest contributor to the fall in GDP growth on an industry basis,” the ABS said in a statement accompanying the release.

“A number of other industries also recorded below trend growth, or declined, this quarter, including financial and insurance services, professional scientific and technical services, rental hiring and real estate services and administrative support services.

“The largest offset to these falls was agriculture which grew 7.5 per cent.”

Mining production had no net impact on growth, while the nation’s terms of trade improved 4.5 per cent.

On a state-by-state basis, it was Western Australia that showed the starkest decline in growth as the end of the mining boom has caused home building to fall off a cliff.

State final demand fell 3.8 per cent in the west, after a 2.7 per cent retreat in the June quarter.

Among other regions, Tasmania, the ACT and Victoria all recorded a negative quarterly reading, while the Northern Territory’s 4.7 per cent expansion was the standout.

Home building was also a weight in Victoria, with a 9 per cent drop off in new home building activity after a record run, although this was blamed on a wetter period through late-winter and early spring.

New South Wales, Queensland and South Australia all expanded a modest 0.1 per cent.

Commonwealth Bank chief economist Michael Blythe said a turnaround was imminent as the output tied to the recent mining investment boom – headlined by three giant gas projects in Queensland – would start to show up in local data.

“Looking ahead, growth headwinds are easing. And some growth tailwinds are strengthening,” he said.

“In a sense it should be easier for the economy to grow from here. The income drag from falling commodity prices has ended in spectacular fashion with the surge in key bulk commodity prices (and) the spending drag from falling mining capex will soon be complete.

“What lies ahead are the benefits of rising mining production and resource exports.”

CommSec chief economist Craig James said the economy was hit by a “perfect storm” in the September quarter.

“This will turn out to be just a blip on the radar screen, but a very important blip. Many Australians have become complacent. And that includes businesses and politicians,” he said.

“The only way the economy can grow is by Australians spending, investing and employing. Australians didn’t do this in the September quarter. The Reserve Bank has been intimating for some time, monetary policy is reaching its limits. Infrastructure spending may prove useful in coming quarters in providing fresh momentum to the economy.”

“In the September quarter the economy was hit by a perfect storm. Not only was there the reaction to the UK ‘Brexit’ vote, there was also the federal election and then there was the uncertainty about the US elections. And clearly, when there is a lot of uncertainty around, consumers and businesses tend to delay decisions to spend, invest and employ. A big fall in public investment also accounted for the bulk of the contraction of activity in the quarter.”

Mr Morrison said the 0.5 per cent fall in economic growth in the September quarter was “not just a reminder and wake-up call” but a “demand in the national interest” for the parliament to support the government’s economic policies.

“We can never take our growth for granted in this country, ever.”

Mr Morrison said Australia’s real annual growth was still higher than six of the world’s G7 economies - the US, Canada, Japan, Germany and the OECD average and second only to the UK.

“Today’s national accounts data demands the support in the national interest for the government’s national economic plan for jobs and growth that we outlined this year,’ he said at a press conference in Canberra.

“We’re looking for partners in this parliament who want to go on that journey with us so we can set up the next 25 years of growth, and today’s data says it’s time to join the national economic plan for jobs and growth.

“A wake-up call,” says Scott Morrison.

While today’s figures were a bigger decline in growth than expected, Mr Morrison said the government had already been taking a conservative approach to the budget update due to be handed down on December 19.

He said growth was not being held back by public final demand, which was up 4.8 per cent through the year.

He said the missing ingredient was private investment.

“The bit in the picture which needs to be there and isn’t there is that private investment,” he said.

Australian Chamber of Commerce and Industry chief executive James Pearson said the national accounts showed it was important to have tax cuts to stimulate investment and boost competitiveness.

“Australia must not be like the frog in the pot of water that is slowly brought to boil,’ Mr Pearson said. “The latest GDP figures show why Australians cannot afford to be complacent. To regain our competitiveness, and therefore create and sustain jobs, we must encourage our businesses, which employ most Australian workers, to invest and grow.”

“That includes by cutting the burden of company tax to stimulate investment, making it easier to hire people through sensible changes to workplace relations and helping our young people to get an apprenticeship. Without action the standard of living we have worked so hard to achieve is at risk.”