Economy shrinks: Wake-up call for Australia

National accounts

• Economy contracts: The economy contracted by 0.5 per cent in the September quarter after an upwardly-revised 0.6 per cent increase in the June quarter (previously up 0.5 per cent). The Aussie dollar fell half a cent in response. It was the first contraction in the economy for 5½ years. Annual economic growth slowed from 3.1 per cent to 1.8 per cent.
• Contribution to growth: The biggest contribution to growth came from household investment (+0.3 percentage points) followed by inventories (+0.1pp). The biggest drag on growth was public investment (-0.5pp) followed by net exports (-0.2pp) and dwelling investment, ownership transfer costs and commercial construction (all -0.1pp)
• Income: Real gross national income rose by 0.9 per cent in the September quarter to be up 3.2 per cent on the year. In nominal terms GDP lifted 0.5 per cent in the quarter and rose by 3.0 per cent over the year.
• Productivity: Gross value added per hours worked in the market sector fell by 0.8 per cent in the September quarter after rising by 1.7 per cent in the June quarter. Annual growth was 0.7 per cent.
• Industry sectors: Eleven of the 19 industry sectors expanded in the September quarter. The strongest sector was Agriculture, forestry and fishing, up 7.5 per cent and adding 0.2 percentage points (pp) to growth. Finance and insurance services added 0.1pp. The Construction sector fell by 3.6 per cent in the quarter (-0.3pp). Mining, “Other services” and Rental, hiring and real estate services all took 0.1pp off growth.

What does it all mean?

• 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. 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.
• While spending measures of the economy were weak in the September quarter, income measures were actually quite strong. And the farm sector was also strong in the quarter and should also be a key contributor to growth in coming quarters. For those who may have forgotten after 25 years of consistent economic growth, a ‘technical recession’ involves two consecutive quarters of contraction in the economy. We don’t believe there are grounds for another quarter of contraction. And indeed it would be amazing if there was some variant of ‘recession’ with a jobless rate of 5.6 per cent.
• The Reserve Bank is always looking ahead and so must we. The outlook for the economy remains bright with record home building, a record winter crop, unemployment at 3½-year lows and super-low interest rates. Already the data for the December quarter has been more upbeat including retail spending and job ads.
• The Reserve Bank warned yesterday that annual economic growth would slow before it picked up in 2017. That is our expectation also. The economy should grow near its ‘potential’ rate of 3 per cent in 2017. We continue to believe that interest rates will remain on hold in coming months. But no one will be thinking of rate hikes any time soon.