Australia's economy is likely to have slowed, the question is by how much?


December 02, 2018 16:30:51

The old gag; “ask five economists and you’ll get five different answers — six if one went to Harvard” appears as relevant as ever when scanning the forecasts of leading market economists ahead of this week’s third quarter National Accounts release.

Key points:

  • The consensus forecast is GDP growth will slip to 3.3pc over the year as a softer housing market impacts
  • Global equity markets rebounded strongly last week, leaving ASX in their wake
  • Markets will now focus on US/China trade talks and interest rate decisions in coming weeks

While none of the 19 economists surveyed by Reuters went to Harvard — thereby diminishing the diversity of thought a bit — there is still a significant range of views about how the Australian economy has been tracking.

At one end of the spectrum Morgan Stanley’s Daniel Blake has the economy still growing, but slowing markedly.

Citi’s Paul Brennen has a sunnier view, arguing the economy probably accelerated over the three months to September.

Having said that, the differences would appear marginal to the average punter, but reflect quite different opinions about how different sectors are faring and the risks ahead for Australia.

To be fair, all forecasts as of the close of business on Friday came with a caveat that a release of GDP “partials” — relating to trade as well as business and government spending — in coming days could change things.

Bear view

The Morgan Stanley house view has tended to be one of the gloomiest on the street.

Mr Blake said he expected the 3.4 per cent year-on-year GDP growth achieved in the second quarter was “the peak” for the time being.

He has growth over Q3 pencilled in at 0.4 per cent, or 3.1 per cent over the year.

“Looking into next year, we expect the headwinds of consumer spending and dwelling investment to offset the supports of business capex, government spending and exports, and see growth slow moderately below trend to around 2.5 per cent,” Mr Blake said.

Bull view

Citi has quarterly growth at 0.8 per cent and 3.5 per cent for the year. Even then, Mr Brennan says the main risk to his forecast is being too conservative.

“Second half of the year likely started at a solid clip,” he said.

While his forecast is a bit softer than the average 1 per cent quarterly growth over the first half of the year, it is still pretty healthy.

He marked it down a bit due to the ending of growth in dwelling investment, the likely final phase of the unwinding of the mining investment boom, and slower growth in profits.

Nonetheless, Mr Brennan said he may have set his sights a bit low as net exports, consumer spending and wages may provide positive surprises.

“As usual, public sector investment is a wildcard given its volatility quarter-to-quarter, which reflects swings in defence spending and asset purchases,” he noted.

“However, the underlying trend should be supported by ongoing large infrastructure spending.”

Consensus view

NAB represents something closer to the consensus view among the forecasters, calculating the economy eased slightly to 3.2 per cent growth over the year.

“Consumption looks to have slowed following two better-than-expected prints and we expect dwelling investment to make a small subtraction from growth alongside the cooling in the housing market,” NAB’s chief economist Alan Oster said.

“Business investment looks to have weakened slightly this quarter — though we think this is related to quarterly volatility rather than an underlying weakness.”

Q3 GDP forecasts

Forecaster QoQ YoY Key quote
Morgan Stanley 0.4pc 3.1pc Broad-based investment weakness, as well as weak consumer spending should weigh on growth.
NAB 0.5pc 3.2pc Consumption looks to have slowed and we expect dwelling investment to make a small subtraction from growth alongside the cooling in the housing market.
ANZ 0.6pc 3.3pc Public spending and net exports as major contributors to growth, with modest household spending and a decline in business investment.
CBA 0.7pc 3.4pc Household spending, government and net exports will make positive contributions to growth. Flat contribution from business investment.
Citi 0.8pc 3.5pc Net exports, consumer spending and employee compensation are possible candidates for positive surprise.
Consensus (Reuters poll) 0.6pc 3.3pc A marginal slow down from 3.4pc YoY growth in Q2.

RBA view

So what does it mean for the RBA and interest rates? In short, probably not a lot.

The RBA board meets the day before the National Accounts are published.

Even without the ABS’s insights, the board will be comfortable with its forecasts from the most recent Statement on Monetary Policy and comfortable to stay put at the record low cash rate setting of 1.5 per cent.

“The latest set of RBA forecasts continue to point to the next move in rates being up, but that any move is likely some time away,” Mr Oster said.

“Embodied in these forecasts is a relatively strong rate of economic growth and further, gradual, erosion of spare capacity in the economy.”

As former RBA governor Glenn Stevens said around this time of year back in 2015: “We’ve got Christmas. We should just chill out, come back and see what the data says.”

And that will be the RBA’s guiding principle for some time. There’s no board meeting or RBA speeches scheduled in January, and not much in the way of new data either.

The RBA will be off the grid until the board gets back together in early February.

Global markets zig, ASX sags

While Wall Street regained its swagger last week — up almost 5 per cent — the ASX fell again, down almost 1 per cent over the five sessions.

It was the best week for US equities since late 2011 and helped float the boats of European and most Asian markets.

The solid finish to the week also put some optimism into ASX futures trading, with a positive start to December priced in.

Markets on Friday’s close:

  • ASX SPI 200 futures +0.4pc at 5,699 ASX 200 (Friday’s close) -1.6pc at 5,667
  • AUD: 72.2 US cents, 64.7 euro cents, 57.3 British pence, 83.0 Japanese yen, $NZ1.06
  • US: Dow Jones +0.8pc at 25,538 S&P500 +0.8pc at 2,760 NASDAQ +0.8pc at 7,331
  • Europe: FTSE -0.8pc at 6,980 DAX -0.4pc at 11,257 EuroStoxx50 flat at 3,173
  • Commodities: Brent oil -1.4pc at $US59.07/barrel, Gold -0.1pc at $US1222/ounce, Iron ore $US64.90/tonne

After a month most big funds would prefer to forget, a soothing speech from Federal Reserve chair Jerome Powell and the hope some sort of trade rapprochement between the US and China was possible fuelled brisk buying of slabs of shares which had been dumped in previous weeks.

The exception were energy stocks, still blighted by falling oil prices, and individual embarrassments such as Marriott International and the giant conglomerate General Electric.

GE tumbled more than 5 per cent following reports it had not been entirely open about the performance of its struggling insurance business.

Marriott fell by about the same due to the activities of some rather unseemly and uninvited guests.

The hotel chain confessed its Starwood Reservation system had been broken into, with hackers stealing the records of up to 500 million customers.

Commodities were a mixed bag.

Iron ore continued to slide due to falling profitability in the Chinese steel sector, while oil arrested its slump on the belief OPEC would announce another round of production cuts later this week.

US-China trade talks

Much of the markets’ trading is balanced precariously on the outcome of talks between US President Donald Trump and his Chinese counterpart Xi Jinping off to the side at the G20 Summit in Buenos Aires.

The truce, putting new tariffs on ice for a while and China agreeing to buy more US goods, was as good an outcome as could be expected. Tariffs already levied will remain in place.

There was no “peace-in-our-time” agreement, just a pledge to keep working towards one.

Bank of America Merrill Lynch chief china economist Helen Qiao said it would have been a surprise had a major deal was brokered.

“The Trump administration will unlikely scale back the tariff measures unless he sees pain in US political support, the economy or stock market. And, so far, the costs for the US are simply too small to motivate a serious negotiation towards a deal,” she wrote in a note before the summit.

But “no deal” should not be viewed as particularly alarming, according to Ms Qiao.

“If our base case plays out and no trade deal is agreed at the meeting, we expect Chinese policymakers to roll out more easing measures to shore up growth,” she said.

“The Government not only wants to shore up the economy for its own sake, but also to put itself in a better negotiating position.

“We also believe China has the tools, on the monetary, fiscal and property front, to inoculate itself against a further escalation in the trade war.”

Global risks mount in December

Aside from the Trump-Xi talks, there is a welter of risk worrying the market in the weeks ahead.

On Tuesday, the European Court of Justice’s advocate general will release his opinion on whether Britain can unilaterally pull up stumps and leave the EU.

It may not be binding, but still has potential to further upset British Prime Minister Theresa May’s rather wobbly plans.

On Wednesday, Federal Reserve chair Jerome Powell fronts Congress. He has so far stared down Mr Trump on monetary policy. Expect more of the same this week.

Friday and Saturday sees the OPEC leaders gather at their Vienna redoubt. The Russians will be invited along as associate-cartel members.

Oil prices fell around 30 per cent in November, and speculation is mounting significant production cuts will be endorsed to stem the haemorrhaging.

The following week (December 11) the UK Parliament votes on Brexit.

The European Central Bank holds its last meeting for the year on December 13 and is expected to end its 2.6 trillion euro ($4 trillion) bond buying program this month.

Finally, the Federal Reserve has one more meeting as well (December 19) and more than likely one more rate rise for the year.

Of more interest will be whether there is any change to the projected three hikes for 2019.

Data deluge

Locally, it is the sort of week macro-policy wonks dream about.

Partial GDP data such as business indicators — sales, profit and wages — on Monday and Tuesday’s net exports and government business will be stripped back to whether they have contributed to, or subtracted from economic growth.

All be revealed in Wednesday’s National Accounts.

But before any of that, CoreLogic posts its monthly home price index early on Monday morning.

Home owners used to love this first of the month ritual, while those outside looking to get into the market dreaded the ever-escalating prices.

Both camps have pretty well switched their views on the survey, particularly highly-geared investors who are seeing their capital gains steadily whittled away.

There’s been enough data around already to point to another large fall in November, around 1 per cent across the board, with Sydney and Melbourne continuing to lead the charge downhill.

Preliminary analysis of Saturday’s clearance rates suggest fewer than 40 per cent of Sydney properties sold at auction. Clearance rates were little better in Melbourne.

As AMP’s Shane Oliver tweeted, “Price falls to continue.”

Monday also sees the release of October’s building approvals.

It tends to be a fairly volatile series, but the general trend has been down in recent times, albeit from fairly lofty heights.

The market punt is a 1 per cent fall over the month, but outsized moves either side of that won’t change thinking much.

Statisticians being statisticians don’t even pause to sharpen the HBs after the massive National Accounts tome, and punch out October’s trade balance and retail trade numbers on Thursday.

Trade has been on surplus-driven winning streak since the start of the year and it would be a massive surprise if it didn’t continue.

The market’s forecast is a $3 billion surplus and another record monthly export effort.

Retail sales haven’t been great, but at least they continue to grow. They’ve been expanding by around 0.4 per cent a month, for months. Much the same is expected this time around.

However, retail data is being analysed more intensely lately to see if falling house prices are depressing consumers’ spending spirits.

Given household spending makes up around 60 per cent of the economy, a dose of consumer anxiety can have a profoundly negative impact on future GDP numbers.


Date Event Comment



House prices Nov: Slide doesn’t appear to have bottomed yet, another 0.8pc decline tipped
Business indicators Q3: Sales, profits, inventories &wages all feed into GDP calculation
Building approvals Oct:: Very volatile forward indicator of activity. Solid, but trending down
Manufacturing surveys Nov: PMIs from both AiG & CBA tipped to show solid activity
Metcash results First half results from the supermarket chain and supplier



RBA board meeting No change to rates expected
Current account balance/Net exports Q3:
Government finance Q3: Another GDP partial covering spending & investment of all tiers of government. Has helped keep GDP growth strong



National accounts/GDP Q3: Was
Telstra investor day Insights into future plans, like to focus on 5G roll out this year
TPG AGM Focus will be on the ambitious merger with Vodafone



Balance of trade Oct: Another strong surplus thanks to resources exports
Retail sales Oct:
Nufarm AGM Will provide an update on the impact of drought. Questions about Glyphosate safety too



Origin investor day Share price has been punished by oil slide lately. Focus on LNG business and power generation


Date Event Comment



US: Manufacturing survey Nov: Starting to ease, but no alarm bells just yet



EU: Brexit ruling European Court of Justice will rule on whether the UK can leave the EU



US: Fed speak Chair Jerome Powell addresses Congress on the economy
US: Jobs Nov: ADP employment measure expected to show 190K new jobs last month



US: Trade balance Oct: Has become a political issue. Another big deficit around $US50b, but focus on Chinese deficit
OPEC meeting OPEC likely to cut production to lift oil price at the meeting in Vienna



US: Jobs Nov: The key employment figure Non-farm payrolls likely to show 200K new jobs last month. Wage growth the focus









First posted

December 02, 2018 11:20:53

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