Industry Focus

SOCIAL SECTOR Australian economy MATTHEW HASSAN, SENIOR ECONOMIST The sluggish, subpar growth ... Australia's June quarter national accounts provided confirmation that relatively subdued conditions extended into mid-2013, with a lack of momentum heading into the September quarter. GDP growth in the June quarter met our expectations, at 0.6% for the quarter and 2.6% for the year. ... that is expected to persist into 2014 ... Our GDP growth forecasts for calendar 2013 and 2014 are all but unchanged. We continue to expect growth to average 2.5% in 2013 and 2.3% in 2014 and that growth will be 2.5% through 2014. Our forecast for growth through 2013 has been adjusted, rounding down to 2.2% from 2.5%. Economic expansion at such a pace is below trend, which is judged to be about 3.2%. This is placing upward pressure on the unemployment rate, which is 5.7% currently, up from 5.1% early in 2012, and forecast to rise to about 6.5% in the second half of 2014. The international backdrop is challenging, with global growth stuck below trend. We expect world growth to hold at about 2.8% this year and next, in contrast to the 'official family' view that world growth will accelerate to 3.6% in 2014 (recently downgraded from 3.8%). Domestically, the mining investment boom is cresting and overall business conditions across the broader economy are sluggish. This is despite the Reserve Bank delivering 225bps of rate cuts since November 2011. Conditions in the housing sector are improving, but there has been a lacklustre response from consumer spending and non-mining business investment to date. A still relatively high currency and tight fiscal policy are leaning against lower rates, hampering efforts by the monetary authorities to redistribute growth. ... now looks worse following benchmark revisions. Revised annual benchmarks released this month by the ABS emphasise the current lack of momentum. Annual GDP growth for the 2012–13 financial year was pared back from 2.9% to 2.6%. With growth in 2011–12 marked up from 3.4% to 3.6%, the revisions now show a more pronounced 1ppt slowdown. Although at time of press we do not yet have a quarterly profile for the revision—that will be released with the September quarter national accounts on December 4—the benchmark revisions could easily lower the 'stepping off' growth rate in the June quarter from 2.6% to 2.3%. That would, in turn, challenge the RBA's frequent assessment that the Australian economy has been growing 'a bit below trend'. Consumer profile more downbeat ... The annual accounts draw on a wider range of data sources than the quarterly estimates, providing a better estimate of activity and a more detailed picture of the economy. The 2012–13 release had several points of interest. Revisions saw the profile for consumer spending and savings altered significantly with lower growth in spending (2011–12 cut from 3.3% to 2.5% and 2012–13 from 2.4% to 2.1%) and higher household savings rates in 2010–11 and 2011–12 (the latter lifted to a peak of 11.7%). Revisions to dwelling investment also moved more of the 2011–12 weakness into 2012–13, dampening the growth profile. ... and investment detail shows stark contrasts. The annual accounts included only minor changes to business investment. However, additional industry detail shows the extent of the mining investment boom and weakness across non-mining sectors. Allowing for economic depreciation on existing assets, new investment in the mining sector has been increasing the sector's total capital stock by 20%pa over the last two financial years—a phenomenal pace compared to the 4% long-run average prior to the mining boom. In contrast, net growth in the capital stock has been just 3.3% across the non-mining business sector, well below the long-run average rate of 4%. Improving tone to monthly data ... Circling back to the more timely indicators, the last month has seen a clear improving tone. The housing sector has been particularly upbeat with price growth accelerating to 7.6%yr nationally (11.5%yr in Sydney) and August showing a sharp kickup in dwelling approvals (+14.4%). While the heavy concentration of 'high-rise' in the approvals rise and the uneven price performance across the capital cities are important caveats, the housing upturn does appear to be gaining momentum for now (WA is a notable exception). Retail sales also posted a better than expected September (nominal sales +0.8%mth, Q3 volumes +0.7%qtr). While the bar from expectations was not set very high, the gain is a promising sign that the electioninspired rally in sentiment in recent months is seeing some lift in spending. ... next few updates will be critical, especially on capex. The signal from business and the labour market remains more ambiguous. The NAB business survey showed a strong gain in confidence in September, the 12.3 reading the highest since April 2010. However, this looks to be mainly an election 'feel-good' factor with a much more muted lift in (still weak) business conditions. The industry detail in this and other surveys suggest only housing-related sectors are seeing a material improvement. Meanwhile, the October labour force survey shows no momentum on jobs growth with full-time employment down 0.7%yr. For growth prospects, the critical questions are: whether conditions follow confidence, or vice versa; and how the mix impacts businesses' employment and investment plans. The latter will see a particularly important update with the November 28 release of the ABS's September quarter capex survey, which would have been conducted in Oct–Nov, i.e. post election. 14 Industry Focus

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