Cliff Notes: growth headwinds
Key insights from the week that was.
Australia’s Q3 National Accounts disappointed expectations with GDP up just 0.3% (0.8%yr) as the gap between public and private demand widened – the latter now stalled for six months. While partly explained by the ‘reallocation’ of electricity spending by households to the government through energy rebates, the majority of the divergence comes as a consequence of prolonged weakness in real incomes, elevated interest rates and a historically-high tax burden. Highlighting the cumulative impact on the economy, Q3 marked the sixth consecutive quarterly decline in per capita GDP, the longest (but not deepest) contraction since the 1950s, when official records begin. In this week’s essay, Chief Economist Luci Ellis considers the consequences for productivity and monetary policy.
Looking into the detail of the National Accounts, it is hardly surprising that the primary contributor to the Q3 surprise was household consumption, flatlining in Q3 to be up just 0.4% over the year. The underlying picture for real household disposable incomes was more constructive owing to the stage 3 tax cuts and disinflation, but the 0.8% gain was saved not spent – a result foreshadowed by the Westpac Consumer Panel. On current data, the latest updates on retail sales and experimental measures of household spending point to a solid lift in consumption in October, but our measure of card activity cautions that shifting seasonal patterns around end-of-year discounting are likely to distort affected monthly reads, as occurred last year. Looking to 2025, income and saving dynamics stand as significant headwinds for the recovery in consumption growth.
The external sector also provided little support for GDP in Q3, the current account deficit narrowing slightly from a materially downwardly revised figure of –$16.4bn to –$14.1bn in Q3. The terms of trade are still elevated but have fallen back over the past year; export volumes are also struggling as import volumes gain steadily, albeit recently at a slower pace. While net exports have added 0.1ppts to growth in both Q2 and Q3, prior weakness saw the external account subtract a percentage point from GDP growth over the year.
Before moving offshore, it is worth noting that the latest CoreLogic data highlighted a broadening in the nascent slowdown in Australian house price growth. Affordability is increasingly a concern across the capitals – price growth slowing in Perth, Adelaide and Brisbane, as buyers lower their expectations, and in outright decline in Sydney and Melbourne, where many would be buyers have been priced out. Supply remains critical for the affordability outlook; encouragingly, the firming uptrend in dwelling approvals is coinciding with tentative evidence of easing supply constraints for construction, balancing the risks around the pipeline. For more detail on our views around the housing market, see our latest Housing Pulse on Westpac IQ.
Ahead of tonight’s employment report, data received for the US continued to support a 25bp cut at the FOMC’s December meeting.
JOLTS job openings rose from 7.4mn to 7.7mn in October, reversing September’s decline. Looking through the monthly volatility, the trend remains consistent with a labour market that is slowly decelerating from a starting point broadly consistent with the pre-pandemic experience – when both wages and inflation were benign. The FOMC’s December Beige Book provided further evidence of labour market balance with some glimpses of downside risks, employment characterised as “flat or up only slightly across Districts” and wage growth having “softened to a modest pace”. Unsurprisingly, on inflation, prices were said to have risen “only at a modest pace... [and] Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers”.
The ISM services survey corroborated the above view, the headline PMI falling from 56.0 to 52.1 in November and employment weakening from 53.0 to 51.5, both outcomes well below their five-year pre-COVID averages but still expansionary. The ISM manufacturing survey in contrast shone the spotlight on downside risks, the headline and employment indexes well below average at outright contractionary levels. The prices paid measures meanwhile remained consistent with consumer inflation at target. Altogether, this week’s data supports our expectation of a 25bp cut from the FOMC at their 17-18 December policy meeting. Tonight’s employment report and the upcoming November CPI report will inform on the risks to this view and the outlook for policy in 2025. Chair Powell and other recent FOMC speakers have made clear their policy decisions will be made meeting-by-meeting in a data and risk dependent manner.
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