Bears Roar Back as Aussie Growth Seen Stumbling Last Quarter

Updated on
  • Early survey shows economists expect just 0.2% GDP reading
  • Poor data challenge RBA’s central case for growth: Nomura

Australia’s economy may have almost ground to a halt last quarter, challenging views that the next interest-rate move will be a hike.

Economists have begun paring back gross domestic product growth forecasts after recent data showed construction activity fell the most since 2000, wage gains slumped to a fresh record low and more discouraged workers quit the job hunt. That leaves a question mark over the Reserve Bank of Australia’s own projections, which Nomura Holdings Inc. puts at about 0.5 percent to 0.6 percent for the third quarter.

“This is a direct challenge to the RBA’s central case that growth will accelerate to a trend and an above-trend pace,” said Andrew Ticehurst, an interest-rate strategist at Nomura in Sydney. “The GDP data have been overstating the health of the economy,” he said, adding that “it looks like some of the key drivers -- consumer spending and dwelling construction -- are starting to slow.”

Early forecasts received from seven economists for the GDP reading due Dec. 7 so far show a median estimate of just 0.2 percent growth in the three months through September. The quarterly number has only been that low twice in the past five years; it showed a 0.5 percent increase three months earlier.

Weaker data has taken some shine off an economy that looked to have turned the corner from falling mining investment amid a windfall from an unexpected spike in the prices of iron ore and coal -- Australia’s biggest exports.

The source of that upturn was China, where producer prices snapped four years of deflation in September and the central bank has stabilized growth after two years of easing. Australia is the most China-dependent economy in the developed world. Moreover, RBA Governor Philip Lowe estimates his economy is about 80 percent through the unwinding of a mining investment boom, which will remove a drag on growth.

Overshadowing good news from China is the possibility of President-elect Donald Trump making good on his campaign pledge to slap tariffs on the nation’s exports, likely sparking retaliation from the world’s no. 2 economy. Lowe himself said two weeks ago that he hopes “wiser heads prevail” on trade policy.

The China-commodity improvement together with growth Down Under has led traders to all but abandon bets on the RBA cutting the record-low 1.5 percent cash rate any further. They are now pricing in some chance of an increase late next year, as also expected by the Organisation for Economic Co-operation and Development. Goldman Sachs Group Inc. said in October that tightening may start in early 2018.

That all seemed feasible when Australia’s second-quarter annual growth came in at 3.3 percent, well ahead of the 2.75 percent that the Treasury projects as the economy’s potential. A 0.2 percent quarterly increase in the third quarter is likely to bring annual growth down closer to 2.5 percent, according to estimates from Nomura’s Ticehurst.

Meanwhile, the economy has also been shedding full-time jobs and adding only part-time positions this year as underemployment rises. That suggests plenty of spare capacity remains in the labor market, as reflected by weak wages.

“The near-term narrative around Australia’s economy is primed to shift,” said James McIntyre, head of economic research at Macquarie Bank in Sydney. “There is likely to be a reappraisal of the current casual comfort of above-trend GDP growth.”

Data released Wednesday showed building approvals slumped 12.6 percent in October from a month earlier and plunged an annual 24.9 percent amid a sharp downturn in permits to construct apartments.

The next inflection point is Thursday with the release of business investment for the third quarter; the median estimate is for capital expenditure to fall 3 percent over the period after dropping 5.4 percent three months earlier.

“What will eventually follow a weaker GDP outcome is the realization that the RBA’s February forecasts are subsequently facing a growth, and probably inflation, downgrade,” said McIntyre, referring to the central bank’s quarterly update. That would put “a February rate cut back on the table.”

— With assistance by Kimberley Verschuur

(Updates with building approvals data in third-to-last paragraph.)
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