March 6, 2019
By Swati Pandey and Wayne Cole
SYDNEY (Reuters) – Australia’s economy slowed sharply in the second half of last year as consumers shut their wallets and housing construction pulled back, data showed on Wednesday, sending the local currency to a two-month trough.
The gross domestic product (GDP) figures showed the economy expanded 0.2 percent in the fourth quarter, slower than the 0.3 percent increase economists had forecast in a Reuters poll. Third-quarter growth was unrevised at 0.3 percent.
Annual GDP rose a below-trend 2.3 percent to A$1.9 trillion ($1.3 trillion), the slowest pace since mid-2017 and confounding expectations for a 2.5 percent increase.
The dismal figures challenge the optimism of the country’s central bank, which expects growth to pick up to around 3 percent this year.
The data also raises questions over whether the country’s recession-free run of 27 years is losing steam and threatens re-election prospects for Australia’s centre-right government, which has been pitching “jobs and growth” as its key economic mantra.
The disappointing outcome sent the Australian dollar down 0.4 percent to a two-month low of $0.7052 as investors wagered the Reserve Bank of Australia (RBA) would cut interest rates to stimulate the economy.
“Good news was hard to find in the latest assessment of the Australian economy,” said Callam Pickering, economist at jobs site Indeed.
“Households are holding up okay despite lacklustre wage growth, although the key question is how long can that persist?”
Private consumption, which accounts for about 57 percent of Australia’s GDP, contributed just 0.2 percent to overall growth.
Weak savings and spending have already slowed the tills of some of Australia’s biggest businesses. Supermarket chains Coles Group Ltd and Woolworths Group Ltd posted disappointing sales in the second half to last year. Sales fell at electronics retailer Harvey Norman Holdings Ltd, and on Wednesday the country’s biggest department store chain, Myer Holdings Ltd posted its fifth consecutive half-year drop in revenue.
An accelerating decline in Sydney and Melbourne home prices has eaten into consumer wealth at a time when they hold record levels of mortgage debt. A long stretch of unusually slow wages growth has also throttled household incomes, and shows few signs of changing anytime soon.
The sharper-than-expected downturn in the country’s once-booming property market has become a significant point of uncertainty for the RBA, which cut its growth and inflation forecasts last month and moved away from a previous tightening bias.
The fall in home prices has hit dwelling construction, another reason for the soft fourth-quarter outcome. Government spending was the only silver lining in Wednesday’s report.
Much of Australia’s success in recent decades has been due to its ability to attract skilled migrants in such numbers as to propel population growth well above the average of its developed economy peers.
Now, however, annual population growth of 1.6 percent has exceeded the pace of economic expansion.
GDP per person fell in both the December and September quarters, marking only the third time in the past 30 years per capita activity contracted for two consecutive quarters. The last time that happened was in 2006.
Defying the gloom, higher prices for Australia’s resource exports boosted corporate profits and GDP in current dollar terms, which in turn provides a windfall to tax revenues.
As a result, nominal GDP climbed 1.2 percent in the quarter and a rapid 5.5 percent for the year.
The stellar nominal growth has led many economists to speculate the government will shower tax sweeteners on households, including one-off cash transfers ahead of state and federal elections in coming months.
“The RBA governor has made it pretty clear that he’d prefer fiscal policy to take the burden. So, I think there is every chance, in what is going to be a very tightly-run election, that there will be some loosening in fiscal policy,” said RBC economist Su-Lin Ong.
“And that will be a very welcome development.”
(Reporting by Swati Pandey; Editing by Sam Holmes)