7 Dec 2016

Australia's economy has worst fall since global financial crisis

3:25 pm on 7 December 2016

Australia's economy shrank 0.5 percent in the September quarter, well below already pessimistic analyst forecasts - and its steepest decline since the global financial crisis of late 2008.

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The Australian dollar took an immediate dive after today's news. Photo: 123RF

The annual rate of growth was 1.8 percent, according to the Australian Bureau of Statistics (ABS) - also below expectations.

Economists were generally expecting a slight fall in gross domestic product (GDP), with a typical forecast expecting a quarterly decline of 0.1 percent and annual growth of 2.2 percent.

A range of partial figures had led analysts to their downbeat predictions, with yesterday's trade data pointing to a 0.2 percentage point subtraction from economic growth. Construction data released last week was much worse than expected, and business investment was also weak.

However, the final result was considerably weaker than forecast, pushing the Australian dollar down the best part of half a cent to 74.2 US cents by 11.38am AEDT (1.38pm NZT).

The final data showed that slumping private investment in new dwellings contributed 0.3 percentage points to the GDP decline, with new engineering detracting 0.2 percentage points.

Public capital expenditure, such as infrastructure investment, knocked 0.5 percentage points off growth in the September quarter after a strong June quarter.

The ABS noted that higher than usual rainfall contributed to much of the decline in building activity.

Analysts say recession unlikely as national income jumps

The last time Australia had a negative quarter was March 2011, when floods in Queensland knocked out a large part of the nation's coal production.

Prior to that, Australia had negative quarters in December 2008 (where the economy shrank 0.7 percent during the global financial crisis), and December 2000 (a 0.3 percent fall following a flat September quarter on the introduction of the GST).

However, one negative quarter does not meet the widely accepted definition of a recession, which requires two falls in a row, and last occurred in Australia in the first half of 1991.

Another positive is that GDP has rebounded by 1.1 percent in the quarter immediately after each of the previous three negative quarters since the early-'90s recession.

Capital Economics analyst Paul Dales said some kind of rebound was likely again in the current quarter.

"When annual jobs growth has slumped to a two-year low at the same time, there is certainly evidence of a widespread weakening in the economy," he observed.

"But the 0.5 percent month-on-month rebound in retail sales in October suggests that the fourth quarter got off to a good start and a possible 12 percent quarter-on-quarter leap in the terms of trade in the fourth quarter will boost incomes too.

"So Australia will probably avoid its first recession (two consecutive quarters of falling output) in 25 years."

Also in better news, the recent trend of "nominal GDP" and income growth lagging so-called "real GDP" - because of falling commodity prices amid rising export volumes - reversed last quarter, pushing these more accurate measures of household and budget income higher.

Nominal GDP rose 0.5 percent in the September quarter and 3 percent over the year and has a much closer relationship with budget revenue than the headline ABS figure.

Real net national disposable income, which the ABS describes as the national accounts' best measure of household wellbeing, also rose 0.8 percent in the September quarter - largely due to a 4.5 percent jump in the price of Australia's exports relative to the cost of imports.

Treasurer Scott Morrison said a 0.5 percent rise in real net national disposable income per capita was welcome news.

"That is the first time we have seen three consecutive quarters of growth in this living standards measure since 2011," he told reporters.


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