Australian economy struggles to grow as GDP weakens

Australian economy GDP shrinks 2018 2019
Australia's economy has now shrunk on a per capita basis for the second straight month.

The Australian economy has really started to struggle, with the December quarter only managing to grow by 0.2%, taking the annual rate for 2018 down to 2.3%.

The sluggish numbers are a big fall from the 0.5% growth in the previous three months and a far cry from the robust 4% annualised growth rate recorded in the early months of 2018.

The Reserve Bank had forecast an overall growth rate of 2.8% and many other economic forecasters were also above the eventual outcome.

Economy actually shrinking per person

The economic picture was even bleaker if you removed immigration from the equation, with economic output per person shrinking 0.2% in the fourth quarter following on from a 0.1% decline in the third quarter.

It was only by adding people through immigration that the numbers turned barely positive, to just 0.2% growth for the fourth quarter.

The slow growth figures add to pressure on the Reserve Bank to cut official interest rates from their current 1.5% level which has now been in place for 31 months.

However, in releasing the RBA’s March decision to leave rates on hold, the bank pointed to continuing strength in the jobs market, rising business investment and higher levels of spending on public infrastructure as supporting the case to leave rates on hold.

Government spending the main game

Government spending was the biggest contributor to the slightly positive economic growth numbers, with state and local government growth of 6.3% reflecting continued work on a number of large infrastructure projects.

Government final consumption expenditure grew 1.8%, with large contributions from health, aged care and disability services

Household spending weak

The household sector remained very soft, with consumption up a weak 0.4% over the quarter and private sector investment and demand contributing virtually nothing to gross domestic product (GDP) growth, compared to 0.4% which they added over the previous four quarters.

Economists pointed to a number of possible explanations for the soft numbers, including the feeling of lower wealth produced by falling property prices, tightening access to credit as banks made loans more difficult to get and the lack of growth in wages and other forms of household income.

Spending on household goods, cars and utilities were the main drags in the household sector.

RBA keen to see wages grow

The lack of wages growth has been a particular focus by the RBA, which has been impatient to see improving profits and a tight labour market reflected in wage rises.

Speaking at a conference, RBA governor Dr Philip Lowe admitted it was a “puzzle’’ why softer economic output and spending data clashed with widespread signs of strong employment conditions.

“Taken together the September and the December quarters will show growth significantly below trend and substantially below the first half of [last] year,” Dr Lowe said at The Australian Financial Review Business Summit.

“If you look at other indicators of the economy you don’t see that slowdown.”

“The labour market data suggest the economy is growing quite well.”

“Lowest unemployment rate in a long time, highest vacancy rates and every business saying it’s hard to get workers.”

Dr Lowe said Australia was not alone and that several countries were experiencing a growing tension between strong labour market data and softer GDP numbers.

“We are devoting significant resources to understanding this tension,” Dr Lowe said.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.