Data is here: Australia – Q4 GDP (seasonally adjusted): 0.8% q/q (vs. expected +0.7%)

Westpac analysts (in brief):

  • Growth was lopsided in the final quarter of 2013.
  • Exports and an improvement in consumer spending were key positives
  • Business investment was cut sharply
  • Domestic demand was all but flat
  • Net exports added 0.6ppts to GDP in Q4 and added 2.4ppts over the past year.
  • Resource export upswing is evidence that the mining investment boom is paying dividends
  • Import volumes declined by -0.6%qtr, -4.6%yr in Q4, reflective of soft domestic demand
  • Consumption expanded by 0.8% in the quarter. Annual growth lifted to 2.6% in Q4.
  • The pick-up in consumer spending in Q4 came against a backdrop of continued pressure on household incomes, with the quarterly gain ‘funded’ by lower household savings
  • Declining income in per capita terms
  • The household savings ratio declined from 10.6% in Q3 to 9.7% in Q4, the lowest reading since 2010.
  • Forces acting in both directions: rising house prices and an apparent easing in risk aversion would be expected to see savings rates decline; but against this, weak labour market conditions and intense job loss fears are likely to provide a significant ‘precautionary’ motive for continued high levels of saving.
  • New dwelling investment came in at -0.1%qtr, 2.7%yr. A broadly flat result in Q4 exceeds the quarterly partial, which reported a 2.5% fall.
  • The outlook is for a strong upswing in response to low interest rates.
  • Business cut investment spending in Q4, with policy uncertainty around the Federal Election reinforcing an already weak trend. Mining and non-mining sectors both reduced investment. Private business investment declined by -3.4%qtr, -7.2%yr in Q4.
  • Public demand increased by 1.1% in the quarter.
  • Consumption was soft at 0.3%, with a bounce in investment, +4.6%, the source of strength
  • Inventories added 0.2ppts. Farm inventories were a plus, with a bumper wheat harvest in WA and SA.

Key issues

We and the RBA expect GDP growth to be below trend in 2014. Housing construction and resource exports will perform well. But we see three significant exogenous headwinds: a downturn in mining investment; sub-par public demand as governments look to improve their budgets; and a negative income shock via a declining terms of trade associated with a slowing of China.

The balance of these forces, and a still high currency leading to structural change, points to sluggish jobs growth. A negative feedback from the labour market to the household sector will restrain consumer spending and in turn stifle an upturn in non-mining investment.