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Big Aussie GDP miss puts RBA forecasts in jeopardy

Macro
Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

Summary:  Australia's Q3 GDP miss puts the country on track for a far lower rate of growth than the central bank is forecasting.

• Q3 real GDP growth comes in at 0.3% quarter-on-quarter, expectations were for 0.6% while the prior figure was 0.9%.
• Annual pace of growth slows to 2.8% versus a forecasted 3.3%, down from 3.1% and revised from 3.4%.

Ouch! A big miss for GDP in Australia where quarterly GDP growth slid back to 0.3% from 0.9% last quarter, putting the annual GDP growth rate at 2.8%. The pace of expansion is the weakest since Q3'16 when GDP contracted. This is an unnerving drop and confirms the mounting headwinds and growing chorus of expectations that GDP growth will likely be weaker than the Reserve Bank of Australia’s own 3.5% average GDP growth for the coming year.

To meet the 3.5% target for December 2018, the Australian economy would have to advance more than 1% in the coming quarter – not impossible, but unlikely. The last time the economy grew more than 1% in a quarter was back in September 2011 (1.3% q/q GDP growth).

Household spending and private investment both stumbled, weighing on growth. All eyes are on the household indicators with house prices continuing to fall and consumption accounting for around two-thirds of the economy. The effect of a sustained fall in the housing market is a key risk to forecasts and not to be underestimated. The household savings ratio fell to 2.4%, the lowest level since the financial crisis, but this drawdown is failing to support strengthened household consumption. Household spending growth slowed from 0.9% in Q2 to 0.3% against a declining household savings ratio. 
 
Household savings and consumption expenditures (Australia)
The combination of soft household consumption and negative household income growth per capita is cause for concern against the backdrop of a cooling housing market, tighter lending standards and a slowdown in global growth predicted for next year.

The recent strength in the labour market, with unemployment at the lowest level since 2012, may offset the negative wealth effect and fall in consumer spending from the sliding housing market – at least this is what the RBA is banking on. But the risks are mounting that not only will the RBA will have to lower its 3.5% annualised growth forecasts for 2019 as the economy loses momentum, but also the upbeat tone surrounding rate hikes and the likely “next move is up”.

On that basis the RBA looks set to remain on hold for the foreseeable future, and risks are starting to stack up on the downside that the next move could be a rate cut.

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