Scott Morrison

The government’s “jobs and growth” mantra has taken a hammering with the September-quarter national accounts result showing the economy contracted 0.5% in seasonally adjusted terms, the biggest fall since the 0.7% slide in the December 2008 quarter as the collapse of Lehman Brothers crunched demand around the world. That compared with the revised (higher) quarter-on-quarter growth of 0.6% in the three months to June (0.5% originally), making the size of the latest slowdown even greater. The outcome, significantly worse than market forecasts, means economic growth through the year to September was just 1.8% seasonally adjusted.

The bigger-than-expected contraction (the closest market forecast seems to have been Macquarie with a fall of 0.3% in its estimate) had the Aussie dollar fall half a cent in a minute or so to around 72.25, the lowest it has been since May, as investors started pencilling in another rate cut in 2017 instead of figuring on no more reductions by the Reserve Bank. But the chances of a cut are remote at this stage — the RBA anticipated the weaker growth in yesterday’s post-interest rates meeting statement from RBA governor Phil Lowe, who said “some slowing in the year-ended growth rate is likely, before it picks up again.”

As well, economists reckon there will be some revisions of the data because it appears to be too much of an outlier, especially after the significant revisions to the June quarter, which showed it was stronger than expected. Before the release, the AMP’s chief economist Dr Shane Oliver wondered if a negative reading for the September quarter, writing “weak September quarter GDP looks like payback for stronger than expected GDP growth over the year to the June quarter.”

The result was partly the result of a number of one-off factors: a decline from hitherto strong levels of housing construction (partly affected by poor weather), slower retail sales, the continuing decline in mining investment (and the failure of private investment in other sectors to offset that decline) and a weakening in public spending — although the public sector is still providing stimulus to the economy. And higher commodities prices don’t appear to have contributed to growth, with export volumes failing to improve. But they have boosted our terms of trade for a second successive quarter, the first time that has happened since 2011 and the flood-induced boom in iron ore and coal prices.

However, before people get carried away with the inevitable (and irresponsible) “recession looms” headlines, the September quarter result is likely to be a one-off: export volumes should catch up with commodities price rises; despite the peak in housing seeming to have passed, there is still a massive tail of work from recently approved dwelling construction (especially in Sydney, where approvals remain buoyant) and retail sales should spring back. A buoyant Christmas shopping season should bring the economy back on track — making it all the more important that the government and the media avoid further damaging consumer sentiment.

There were some significant positives: the terms of trade rose 4.5% after a 2.1% rise in the June quarter; real net national disposable income (remember the income recession?) rose 0.8% in the September quarter 2016, up from a 0.5% rise in June quarter 2016. This continued growth is largely due to the terms of trade increase. Compensation of employees rose by 1.3% this quarter, driven by the private sector, making for a solid 3.1% in the year to September. Total hours worked were up 0.5% on June while the total number of employees increased 0.4%. Average compensation per employee was up by by 0.8%, suggesting the rise in compensation of employees was driven by more hiring and increased hours worked rather than wage increases.

Household final consumption expenditure grew by 0.4% for the quarter, thanks mostly to the continuing boom in food and coffee with a 2.2% rise in spending across hotels, cafes and restaurants. Smashed avocado on toast and poached eggs plus a chai latte do add value to the economy — but weren’t enough to save it. So get out there and have a merry Christmas with lots of presents.

Peter Fray

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