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Economic growth and Productivity Numbers: Interest Rate Cut Warranted or Not?

  • December 05, 2019 02:04 PM AEDT
  • Team Kalkine
Economic growth and Productivity Numbers: Interest Rate Cut Warranted or Not?

As per recent statistics released by the ABS for September quarter 2019, Australia?s economy grew below market expectations at an annual pace of 1.7 per cent, despite three interest rate cuts announced by the Reserve Bank of Australia (RBA) this year.

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The data also showed that the country observed an economic growth of 0.4 per cent in the September quarter, slower than the last two quarters.

According to the ABS Chief Economist, Bruce Hockman, though the country?s economy continued to expand, the rate of growth stayed less than the long-run average.

Moreover, the recently announced retail sales and trade surplus figures for October 2019 are also not so promising for the Australian economy.

The country?s retail turnover has stagnated in October, while its trade surplus has declined to $4.5 billion in seasonally adjusted terms.

Why Economic Growth was Below Average in September quarter?

September quarter?s growth undershot market consensus of 0.5 per cent GDP growth due to disappointing household sector and subdued domestic final demand.

The household final consumption expenditure rose by just 0.1 per cent during the quarter due to a 0.3 per cent fall in consumption of discretionary goods and services.

Though the Australian government was hoping that September quarter would see the effect of recent tax cuts for low- and middle-income earners, the household expenditure figure left them distressed.

During the quarter, there was a sharp increase in the household saving ratio (4.8) as growth in household gross disposable income outperformed the household final consumption expenditure. The gross disposable income of households rose 2.5 per cent due to a decline in income tax payable that did not transform into an increase in discretionary spending.

Moreover, the contribution of domestic final demand (0.2 percentage points) to the GDP growth was also very modest. The growth in domestic final demand was stimulated by the government final consumption expenditure that rose 0.9 per cent in the quarter.

The ABS September quarter data also demonstrated the following:

  • Health Care and Social Assistance Gross Value Added increased 2.6 per cent in the quarter and 8.3 per cent through the year.
  • Dwelling investment dipped 2.8 per cent in the quarter and 11 per cent through the year, demonstrating continued weakness in building approvals.
  • Mining business investment dropped 7.8 per cent during the quarter and 11.2 per cent through the year, showing the transition of LNG projects to production from investment.

Is Australia Facing a Productivity Slump?

Besides, the productivity figures recently announced by the ABS for 2018?19 were also quite disturbing.

The statistical agency revealed that multifactor productivity (MFP) slipped by 0.4 per cent in 2018?19 on hours worked basis, marking the first fall since 2010?11.

Moreover, the labour productivity tumbled by 0.2 per cent in 2018?19 on hours worked basis, reflecting the first negative recording for 16 industry market sector aggregate since the data series began in 1994-95.

If adjusted for the quality of work performed, the MFP fell by 0.7 per cent, and labour productivity declined by 0.8 per cent during the fiscal year.

As per leading market experts, Australia?s productivity slump is due to the slow rate of technological adoption by the country. They suggest that despite the availability of promising ideas and inventions across the world, the Australian firms are struggling to put them to good use.

The latest figures suggest that the RBA cannot fix the productivity slump alone without the support of the federal government. The experts have raised the need for fiscal stimulus owing to the existing challenges despite record low interest rate levels. They believe that underinvestment from the supply side of the Australian economy is obstructing the economic growth.

Last month, Treasurer Josh Frydenber declared that territory and state?treasurers have decided to formulate potential productivity boosting reforms in some policy areas comprising health, transport, environmental regulation, etc. The Treasurer is of the view that the federation reform could be the secret to expanding productivity in the country.

RBA?s Response to Slowing Economy ? Kept Cash Rate Unchanged at 0.75%

Though the Australian economy is constantly demonstrating signs of a slowdown, the RBA is stuck between surging house prices and weakening economy. In this scenario, the RBA has decided to wait and assess the impact of the previous three interest rate cuts delivered since June this year.

The central bank has kept the interest rate steady at 0.75 per cent in the recent December meeting.

The RBA?s cash rate decision was in line with economists and financial markets? expectations that are anticipating a further reduction in interest rates early in 2020.

It is worth noting that the central bank?s previous rate cuts have so far failed to turn the tide on wage growth, unemployment rate and retail sales.

The retail sales slumped to its lowest level since 1990?s recession in September 2019, rising 0.2 per cent. The increase in retail sales was well below the market expectations of a 0.5 per cent rise.

Moreover, the wage growth was recorded at 2.2 per cent over the year in the September quarter, below the long-term average growth rate level of 3.2 per cent.

Complementing weaker retail volumes and wage growth levels, the unemployment rate was also recorded at a high level, at 5.3 per cent in October, with a fall of 19,000 in the number of people employed.

With the retail sector on its knees, wages still stagnant and high unemployment, the recent GDP growth data was not at all surprising for the close observers of the country?s economy. It was in conformity with the RBA?s statement that Australia has reached a gentle turning point.

As per the central bank, the country?s economic growth is likely to pick up gradually in 2021 to around 3 per cent.

Australian Property Market ? Moving Against the Tide

On one hand, most of the economic indicators are signalling weakening state of the Australian economy, while on the other hand, the property sector is reviving hopes. As per a leading property consultant CoreLogic, the property values of Australia jumped 1.7 per cent in November, marking the largest gain since 2003.

The increase in property prices was driven by a rise in housing prices in Melbourne and Sydney, where prices rose 2.2 per cent and 2.7 per cent, respectively. On a year earlier, the property prices rose 2.2 per cent in Melbourne and 1.6 per cent in Sydney.

In fact, every other capital city of Australia reported a rise in property prices except Darwin, where values dropped 1.8 per cent for November month.

As per market experts, the improvement in housing prices was driven by the following factors:

  • Ease in lending standards by the Australian Prudential Regulation Authority (APRA).
  • Three rate cuts by the RBA.
  • Federal election win of the Coalition government in May, ending ambiguity about tax policy.

Though the property market figures are showing signs of recovery, uncertainty remains over the performance of other economic indicators in the near future. Amidst the current scenario, the financial markets have fully priced another interest rate cut early in 2020, with significant chances of a move to 0.25 per cent.


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