The Australian economy grew at a sluggish 0.3% in the September quarter, seasonally adjusted, the Australian Bureau of Statistics revealed this morning, well below market expectations and suggesting Treasurer Joe Hockey’s budget woes are only going to get worse.

There’s no need for panic: annual growth for the year to September — 2.7% — remains within the frame of the Reserve Bank and Treasury, neither of which expect a return to trend growth of around 3% or a little more until late in 2015. In May, Treasury forecast 2.75% for the whole of 2013-14 and 2.5% growth in 2014-15, and last month the RBA picked 2.5% for calendar 2014 and 2-3% for 2014-15. But the economy will now need a boost in the current quarter, continuing into next year if those forecasts are to be met. Mining’s contribution to growth — unlike in June — was positive, but very weak, and below that of financial services, while construction dragged the economy lower.

Labour productivity continued to rise, but growth is the most anaemic since mid last year, with a rise in the private sector of 0.2% and GDP per hour worked up 0.5%. Indeed, the economy is now travelling at about the same speed as early-mid 2013, which spells bad news for the Treasurer ahead of the forthcoming Mid-Year Economic and Fiscal Outlook. That will give us Treasury’s updated growth forecasts for this year and next but, without a boost to growth, Hockey’s budget is now under pressure not just from falling commodity prices (terms of trade fell 3.5% seasonally adjusted in the September quarter; the annual fall worsened to a drop of nearly 9%, against 7.9% in the June quarter) but from a weaker domestic economy and, potentially, from rising unemployment — this sort of growth, if it continues, won’t be enough to soak up a growing workforce. Nominal GDP actually fell in the quarter — only just (-0.1%) but the budget forecast of 3% is now looking shaky, which will feed directly into budget revenue just as it did for former treasurer Wayne Swan.

The weak quarterly result echoes the performance of the economy a year ago. In the September 2013 quarter, growth slowed to 0.4%, and the annual rate dropped to just 1.9%, seasonally adjusted. Now, the quarter-on-quarter growth rate is lower, but the annual rate of 2.7% remains higher, reflecting the very good growth of 1% in the March quarter (revised down a tad from the original 1.1%, but growth in the December quarter of last year was upped to 0.8%, seasonally adjusted, from the first reported 0.6%). GDP did top the $400 billion mark in the quarter for the first time — a small positive statistical note.

“Maybe it’s time for the Abbott government to swallow its debt and deficit pride and find room for some more stimulus in MYEFO …”

The Reserve Bank has long been warning that the economy is making the transition from the mining investment boom to a more broadly based set of growth drivers, led by housing and household spending, along with exports. They were not enough in the September quarter to offset the impact of a 0.7 of a percentage point fall in Gross Capital Formation, while inventories contracted 0.1 of a point, although the ABS’s business indicators data had shown a rise in the quarter of 0.7%, compared to a 0.9% rise in the June quarter which produced a positive contribution to growth of 0.8 of a point. Net exports contributed 0.8 of a point to growth after detracting by 0.9 of a point in the June quarter.

The savings rate edged down to 9.4% from 9.5% — a year ago it was 10.1%, so Australians are running down their savings to buy houses and consumers as real wages growth slows and national income drops away. Real net disposable income contracted by 0.3%, faster than the 0.2% fall seen in the June quarter. Annual growth slowed 0.8% from 1.0% and will dip lower in coming quarters as the sluggish growth in wages and the weakening terms of trade produce more falls in national income.

Early data on building approvals, house prices and inflation from October and the start of the current quarter, suggest the economy continues to perform in much the same fashion. The fall in the dollar hasn’t been anywhere enough to offset the drop in commodity prices. If the falls in commodity prices steady in the next six months, then the benefit of the lower dollar can start having a positive (but very slow) impact on incomes, but that won’t really be noticed until well into the 2015-16 financial year.

The economy is definitely losing ground and although the GDP report will bring more calls for rate cuts next year, and the Reserve Bank yesterday gave itself some leeway for making a cut yesterday, it is hard to see what another rate cut will do in the short term. Maybe it’s time for the Abbott government to swallow its debt and deficit pride and find room for some more stimulus in MYEFO, or at worst in the May budget. You never know, a bit of largesse might get the budget through the Senate.

Peter Fray

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