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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 3 December 2015

Economy grows by 2.5 per cent

Mixed bag

There’s an old saying that things are rarely as good or bad as they seem, which appears quite apt for what’s been happening in the economy of late.

The Australian National Accounts showed that seasonally adjusted GDP grew by 0.9 per cent for the third quarter in chain volume terms, and by 2.5 per cent over the past year.

The strong quarterly headline result was driven by 4.6 per cent growth in exports of goods and services in the quarter, with a strong 5.2 per cent rebound in mining activity after a decline in the second quarter.

There was also strength in the broader economy evident in household final consumption expenditure, which rose by 0.7 per cent, and new and used dwelling construction, which increased by 2.0 per cent.

Offsetting this was weakness in investment, particularly the expected decline in mining and resources construction.

Australian economy grows by 0.9 per cent

Piecing it together the Australian economy grew by 0.9 per cent in the third quarter and 2.5 per cent over the year to September (with trend growth of 2.3 per cent), while GDP per capita grew by 1.1 per cent.

The industries contributing to growth included financial and insurance services (0.5ppts), healthcare (0.3ppts) and mining (0.3ppts), but manufacturing over the past year was, quite literally, a drag.

Note that Australia last came out of a recession in 1991, though when measured in per capita terms GDP spent four quarters in hades in 2008/9.

Apart from the decline in resources construction, the other related downside was the continuing correction in the terms of trade, which fell by a seasonally adjusted 2.4 per cent in the third quarter.

Real net national income in turn decreased by 0.5 per cent over the quarter and 1.2 per cent over the year, which translates to a proverbial elbow in the goolies for “national economic well-being”, a loose proxy for living standards.

The terms of trade index numbers are still 17 per cent above their average over the very long run, when including the once-in-a-century boom (or 24 per cent if you exclude the last decade) and there will certainly be further declines to come, starting in the final quarter of 2015.

Terms of trade booms can over-correct to the downside, so there could be plenty more of the same in the post.

Final demand

The figures for final demand are volatile and difficult to interpret in real time given the wild revisions.

The data shows that demand has been soft in aggregate in the resources states, which we might expect to continue for the next couple of years as engineering construction plummets.

Over the past two years, a more meaningful timeframe for this data series, state final demand has been strongest in New South Wales and Victoria, with Tasmania having shown some promising signs and South Australia as flat as a tack.

Housing & households

Despite a disappointing lack of contribution from major renovations, dwelling investment has performed impressively in lifting by 21 per cent since June 2012 in chain volume measures terms.

Sub-indices have shown that apartment construction has contributed handsomely to dwelling investment, even if developers have been overdoing the high-density stuff.

Renovation activity is forecast to pick up over the next few years (again), but outside Sydney activity still hasn’t really picked up any head of steam (again).

Waning interest?

Interest payable on dwellings is an interesting data series, with the interest payable declining slightly in the third quarter.

Undertaking a high level analytical review of this figure, given the level of outstanding credit the figure looks a trifle on the low side.

What this may suggest is that a good deal of the recent mortgage market activity has related to discerning borrowers refinancing to more attractive rates.

Certainly when cross-checking to the stock of outstanding housing credit the implied average mortgage rate is comfortably below quoted standard variable rates, suggesting that borrowers have capitalised on the very low fixed rates that have been available in recent years.

Total interest payable on dwellings now sits some 29 per cent below the September 2008 peak.

Given that the population of Australia has increased by 2.4 million persons over this 7 year timeframe, this in turn suggests that many homeowners have seen their annual mortgage burden tumble by well over a third.

Household income account

A quick shufty at the household income account shows that despite a stronger quarter in seasonally adjusted terms compensation of employees has slowed since 2012, with a meagre 2.6 per cent growth over the year.

However, there was stronger growth over the past year for gross income (3.8 per cent), and particularly gross disposable income (3.9 per cent).

The household savings ratio – which is actually a figure derived by deducting household consumption expenditure from net disposable income – held up at 9 per cent.

This suggests that in aggregate there is plenty of gas still in the tank for households, while a fair proportion of homeowners are well ahead on loan repayments, building solid aggregate mortgage buffers.

The wrap

Overall, a strong headline result which masks a range of weaknesses in the underlying economy: declining resources construction, falling terms of trade, and a stalling of income growth.

The latest monthly figures showed little sign of inflationary pressures, and and so futures markets are tentatively eyeing up one further interest rate cut in the first half of 2016.