Stepping in to the breach

Just when two of these stalwarts of recent growth seem to have lost momentum in Q2 2016, government spending may have stepped in to the breach. The changing fortunes of spending growth drivers in Australia’s economy have netted out in reasonable growth, but probably not for much longer.

Falling Business Investment Spending

The one big negative in Australia’s growth story over the past two years has been falling business investment spending which has detracted from quarter-on-quarter GDP growth between 0.2 percentage points and 0.6 percentage points every quarter. Negative quarterly growth contributions in this range look set to persist over the next year, although will probably fade out beyond that. Since mid-2014, other areas of spending have needed to grow well just to get to zero GDP growth, let alone produce the respectable quarterly growth rates that have been recorded. A similar dynamic will still be needed through to mid-2017 at least.

Key Spending Growth Drivers Losing Puff

The problem is that some of the key spending growth drivers in the economy are losing puff. Although only a comparatively small part of spending in the economy, housing activity has fought well above its weight contributing between 0.1 and 0.2 percentage points to GDP growth every quarter over the past two years. Rising housing activity and rising housing prices have also played a major role in encouraging the household sector to lift consumption spending even in the face of weak growth in household disposable income. Household consumption spending is the heavyweight in spending in the economy accounting for more than 50% of total spending and contributing around 0.4 percentage points to GDP growth every quarter over the past two years.

The combined positive contributions to GDP growth from housing and household consumption spending have been enough to offset on average the negative contribution each quarter from business investment, often slightly over-compensating. The factor that has taken a small net positive growth rate to something much stronger has been exports. Export capacity has been much enhanced by the mining investment spending boom and export volumes have been lifting over the past year and more even though demand in Australia’s biggest export market, China, has been patchier. At times, exports have lifted very strongly, such as in Q1 when they contributed more than one percentage point to growth in the quarter.

Q2 GDP Report

In Q2 housing is still likely to contribute to growth, but building over-supply of new homes is pointing to zero or even negative quarterly contribution to growth from say Q4 2016. Household consumption spending looks set to lose a little momentum in today’s Q2 GDP report and will probably flag even more over coming quarters. Retail trade growth has been decelerating this year and a flatter housing market ahead will probably spill over in to even softer retail spending.

Just as the two most consistent contributors to growth are starting to look fatigued, a new growth contributor, stronger government spending has come flying out of the blocks in Q2, likely contributing the best part of a percentage point to growth in the quarter. Much of the likely growth in Q2 comes down to a big lift in state government infrastructure spending, which while it will continue (certainly in New South wales) is unlikely to match the very big lift in Q2. Government spending generally is planned to be on a slow-ahead course under the over-arching theme of trying to balance medium-term budgets and contain growth in public debt. If all goes to the Federal Government’s budget containment plan, the cost may well be weaker GDP growth over the next year, because it will coincide with fading growth prospects for housing, household consumption spending and possibly exports too.           

[Economic Insights 7 September 2016_weekly.pdf]