Aussie economy gets investment lift, but consumers squeezed

SYDNEY: Australia’s economy expanded at the fastest annual pace in over a year last quarter thanks to a long-awaited jump in business investment, but worrying weakness in household spending cast a cloud over the outlook for growth.

Data from the Australian Bureau of Statistics yesterday showed the gross domestic product (GDP) grew by 0.6% in the third quarter, slowing from the previous quarter when it rose 0.9%.

The result just missed market forecasts of growth of 0.7% for the quarter and nudged the local dollar down a quarter of a cent to $0.7580.

The annual pace accelerated to 2.8%, from 1.9% and handily outpaced the United States at 2.3%.

The mixed outcome would be no surprise to the Reserve Bank of Australia (RBA) which only Tuesday kept interest rates steady at 1.5% in anticipation of faster growth and a gradual revival in inflation.

Investors suspect policy will stay on hold for a long time to come and interbank futures are not fully priced for a hike until early 2019.

“If you can’t get a stronger consumer, it’s pretty difficult to get momentum going in GDP,” said Su-Lin Ong, Sydney-based chief economist at RBC Capital.

Household consumption accounts for 55% of Australia’s A$1.7 trillion economy.

“For us, the key in the core of the economy is domestic demand and it’s hard to see how momentum picks up there when you’ve got so many challenges for both consumers and household,” Ong added.

Australian consumers are saddled with a mountain of debt which is rising at a much faster pace than incomes.

Wage growth is crawling at the slowest rate ever, while the unemployment rate is still up around 5.5%.

Indeed, household consumption rose just 0.1% in the quarter, the smallest increase since late 2012.

For us, the key in the core of the economy is domestic demand and it’s hard to see how momentum picks up there when you’ve got so many challenges for both consumers and household. Su-Lin Ong

Some of that spending had to be funded by saving less, with the savings ratio down at a lowly 3.2% compared to around 7% just three years ago.

The paucity of demand meant inflation was also a no-show, with a key measure of domestic prices flat in the quarter.

Analysts noted the economy would have to expand by a strong 0.9% this quarter, if annual growth was not to slow again.

Still, other parts of the economy are chugging along, with non-mining investment appearing to be turning a corner.

The main driver of growth in the third quarter was engineering construction, with a small assist from a build up in inventories.

Private investment rose 4.5% last quarter, the largest gain in four years.

“What happens next depends on whether business investment can continue to offset soft dwellings investment and consumption. We believe it will,” said Paul Dales, chief economist at Capital Economics.

“But our weaker view on consumption largely explains why we doubt GDP growth next year will live up to the RBA’s 3% forecast.”