A year ago this week the Australian Bureau of Statistics reported that GDP had grown by 3.4% in the 2017-18 financial year. With inflation hitting 2.1%, there were calls for an interest rate rise in The Australian Financial Review, The Australian and the various newsletters and notes from business economists and analysts.
Josh Frydenberg had just taken over the role of treasurer from Scott Morrison (who had knifed prime minister Malcolm Turnbull the previous month). The jobs boom, which had started in 2016, wasn’t slowing and the economy was surging.
A year later and how it has all changed. The annual GDP growth rate has halved to 1.4%, interest rates have been slashed to new record lows this year, the jobs boom is ageing, retail is moribund and consumers are not spending. It’s now clear that Australians have voted for a man and a party that have given the country the slowest annual rate of growth since 2009.
It was foolish to expect June’s 0.5% GDP growth — only achieved because a disaster at a Brazilian iron ore mine sparked a six-year-high boom in iron ore prices — to last. This growth was thanks to the contribution of mining exports, profits and investment, overwhelmingly from BHP, Rio Tinto and Fortescue, who boosted sales, profits and dividends as they rode a rebound. That saw the mining sector pump life into the trade account and led to the first current account surplus in 44 years.
It saved the economy and Scott Morrison from having to take the blame for a quarter of no or negative growth.
That will not happen this quarter.
Iron ore prices have since fallen sharply — down nearly 30%. Oil and LNG prices have fallen; gold is higher but copper is now at two-year lows. The Reserve Bank’s commodity price index fell 4.2% in Australian dollar terms in August. The economy will have to find growth elsewhere, which will be very hard as the data since June 30 shows an economy still moribund.
This won’t be fixed by the tax refund, nor will the rebound in house prices help — that is happening at the top end of the market where there was a 1.9% rise in August. At the bottom end, in the so-called affordable housing sector, prices fell 0.4%. The two interest rate cuts from the Reserve Bank won’t help — two cuts in 2016 helped, but petered out because they were not matched by changes to fiscal policy.
The early data from the current quarter has shown a small rise in the unemployment rate — up to 5.3% from 5.2% the month before, and 5.1% at the start of the year. Car sales fell more than 10% in August, one of the steepest monthly falls in years. That was after a 2.8% fall in July. Dwelling approvals in July fell 9.7% (seasonally adjusted) and in the major surprise, retail sales fell 0.1% when the market had been looking for a rise of 0.2% to 0.4% (based on expectations the spending of the tax refund would work its “magic”).
All this confirms that the weak activity that we have seen for 18 months has continued into the September quarter and the start of 2019-20.
The sliding housing sector is the biggest danger to growth over the next year. The near 10% slide in July approvals tells us the slump will continue well into 2020. Housing investment fell in the June quarter and lopped 0.2 percentage points from GDP growth. The fall in business stocks cut GDP by 0.5%, so the impact from the slowdown on growth was very large.
New residential construction fell by 5.9% and alterations and additions were down by 1.4%. But due to the rate cuts, ownership transfer costs (a proxy for housing turnover activity) improved by 4.3% in the quarter. The dwelling approvals data shows apartment approvals are down 44% in the year to July and new houses off 16.6% (with total approvals plunging 28% in the 12 months). Those falls are still working their way through the system.
That’s one of the reasons why the market expects the Reserve Bank to cut rates again later this year and possibly once more in the first half of 2020. That does not support the comfortable assertions we heard on Wednesday and Thursday — that those rate cuts will do the job and boost the economy. If the RBA thought the rate cuts would boost activity, it would not have made it clear in Tuesday’s post meeting statement from governor Philip Lowe, who said the bank stands ready to “ease monetary policy further if needed to support sustainable growth in the economy”.