Q4 GDP Partials & Forecast Update
We have upgraded our forecast of economic growth following the latest batch of partial activity indicators in the run-up to Q4 GDP, due tomorrow. We now expect the economy grew by 0.7% in Q4, up from our initial estimate of 0.4% in our preview last week. The upside surprise on business inventories was met with a lower than anticipated growth in imports, albeit with some of the latter pointing to slightly softer domestic demand.
Q4 GDP Forecast Update
The final set of partial economic indicators were released today ahead of tomorrow's headliner, the National Accounts. The results came in stronger than our expectations. In particular, the external sector has provided a firmer impulse than we had anticipated.
As such, we have revised our GDP forecast up to 0.7% in the December quarter 2024 from 0.4%qtr previously pencilled in (see here). This would see annual growth increase from 0.8%yr to 1.4%yr, marking the first improvement in the annual pace since the September quarter 2023.
The revision to our forecast was driven by the more volatile components of GDP. Net exports and inventories came in firmer for the quarter and are set to provide a boost to economic growth. Combined they now add 0.4ppts to GDP, while previously we had anticipated a –0.2ppt net effect. This is partially offset by a slightly softer domestic demand picture around consumer tourism spend and equipment investment.
The external sector is now expected to contribute around 0.2ppts to growth in the December quarter, previously we had forecasted a 0.2ppt detraction. The revision comes on the back of weaker than expected services imports. As such, imports are set to make a flat contribution to growth for Q4 (-0.3ppts previously), while exports will add 0.2ppts (+0.1ppts previously). Meanwhile, total inventories – comprising private non-farm and public inventories – are set to add 0.2ppts from growth in the quarter, up from the flat result previously expected.
Domestic demand (new) is expected to have risen by 0.5% in the December quarter, slightly below our preview result.
The run up in inventories and lower than anticipated imports presented some downside risks to our new private demand estimate, leading to a downward revision to our new private demand forecast to 0.4%qtr. This resulted from a reduction in our household consumption forecast to 0.5%qtr (previously 0.7%qtr), given consumer spending includes Australian tourism spend abroad.
Partially offsetting this is some underlying strength in new public demand. While we had already anticipated a solid increase, projecting a 0.8% quarterly increase in Q4, today's partial data came in stronger at 1.0% for the quarter. New public demand is now expected to contribute 0.3ppts to Q4 GDP growth (+0.2ppts previously).
Public Demand
The results around public demand broadly met our expectations. As reported in today’s data, total public demand rose 0.9% in Q4, thereby adding 0.2ppts to GDP growth. After accounting for net asset transfers between the public and private sector, we find that new public demand rose 1.0% in Q4, which is expected to add 0.3ppts to GDP growth. New public demand is expected to reach 27.5% of GDP, overtaking the previous record set in Q3.
Government consumption continues grow, up 0.7% in Q4, albeit at a slower pace than what was seen over the previous two quarters (1.5% in Q2, 1.4% in Q3). Cost-of-living support, public sector wages and the expansion of the care economy have been the main drivers behind this increase in expenditure. Compositionally, state and local government spending (0.8%) once again outstripped spending at the federal level (0.5%).
Additionally, public investment also continues to contribute to economic growth. Total public investment grew 1.8% in Q4, while new public investment rose 2.3%. This adds to evidence that constraints that have affected the construction sector over recent years have started to ease.
It should also be noted that there were upward revisions to the level of new public demand, although the scale of these revisions was not as large as seen last quarter. The level of new public demand has been revised up by around $8.0bn through the March to September quarters, representing about a 1.6% increase overall.
External Sector
After recording the largest deficit in eight years in the June quarter, Australia’s current account balance improved through the second half of last year. In the September quarter the deficit shrank by almost $2.5bn, and today’s figures for the December quarter showed a further improvement of $1.3bn taking the deficit to $12.5bn.
Among the key components, the primary income deficit widened to $19.8bn, as outflows increased $2.2bn. They were driven by higher interest paid overseas, as foreign holdings of Australian-issued debt rose, and higher dividend payments to overseas investors.
The deterioration in the primary income balance was offset by higher trade surplus, which almost doubled, rising to $7.5bn. Goods trade contributed $2bn to the improvement (rising goods trade surplus), while services added $1.7bn (falling services trade deficit).
The picture was significantly distorted by price effects. The terms of trade rose 1.8%qtr, marking the first increase in four quarters. It was supported by a weakening in the exchange rate and higher global commodity prices over the quarter. Export prices went up 2.6%qtr, while import prices rose at a more modest pace of 0.8%qtr.
Despite the improvement in the nominal trade flows, in price-adjusted terms goods trade provided a negative contribution to GDP. Real goods exports rose only 0.1%qtr as the impact from higher exports across rural goods categories was offset by lower iron ore shipments, while real goods imports were 1.1%qtr higher, as consumption goods imports rose 1.9%qtr following a 4% decline in the September quarter.
On the services side, real exports increased 3.4%qtr while imports were 2.5%qtr lower. The former seems to be explained by stronger exports of intellectual property services relating to pharmaceuticals and computer software. Meanwhile, the latter was driven chiefly by lower travel services imports, which does not seem to be fully aligned with the fact that the number of Australian residents travelling abroad for a short-term visit increased notably in the latest quarter.
Overall, net trade will add 0.2ppts to GDP growth in the December quarter, split into a -0.2ppt contribution from goods trade and a +0.3ppt contribution from services (the numbers do not add up due to rounding). This will be the largest positive growth contribution from the external sector in six quarters.
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