The R word has been bandied about liberally since last week’s national accounts revealed that Australia’s real (inflation-adjusted) gross domestic product (GDP) contracted by 0.5 per cent in the first quarter of the 2016-17 financial year (Figure 1 in the attached graphical summary of the accounts).
Without wanting to downplay the significance of a single quarter’s contraction in the economy, it is hardly unusual for the economy to contract for one quarter only without then slipping into recession.
Since the recession we apparently ‘had to have’ in the early 1990s, real GDP has contracted in four individual quarters. Apart from last week’s reading, the last time was in the March quarter of 2011, when floods and cyclones in Queensland hit economic output badly enough to dent even the national economy. And before that it was in the December quarter of 2008 in the shadows of the collapse of Lehman Brothers, which triggered aggressive global easing of both monetary and fiscal policy.
This time it was no single ‘perfect storm’, but rather a confluence of events that conspired to drag the economy backwards, most likely temporarily.
The ABS advises that wet weather hampered construction activity in the September quarter. Assuming the skies have cleared for long enough for construction to get back on track this quarter, dwelling construction on the eastern seaboard at least will provide a boost to growth in the December quarter, although even in NSW and Victoria, dwelling approvals have peaked, pointing to a typical cyclical slowing throughout the 2017 calendar year.
The weather certainly was not what caused the slide in dwelling construction in WA – the steep slowing in population growth out west is the main reason approvals peaked in WA well before they did in the rest of Australia.
It is not unusual for a factor that has little or nothing to do with the economic cycle to drag GDP growth lower in a single quarter. A big drop in spending on defence weapons platforms in the September quarter accounted for 0.2 of a percentage point of the 0.5 per cent contraction in GDP.
The drop in weapons platform spending was allocated amongst the states according to their share of the nation’s estimated resident population (ERP). So lower defence spending in the quarter was hardly the biggest driver of a fifth successive quarter of contraction in WA’s real state final demand (SFD) in the September quarter.
As has been the case ever since the construction phase of the resources boom gave way to the less labour-intensive production phase, the precipitous decline in business investment is what has dragged WA’s SFD down markedly. But the headline business investment that feeds directly into SFD includes the portion of the spending carried out overseas – even if the vast majority of the work occurs overseas, such as floating LNG facilities.
So state final demand significantly overstates WA’s economic growth when it is booming, but equally overstates downturns just as much when growth is slowing.
The WA economy was never really growing at 16 per cent per annum in 2012, any more than it contracted by almost 10 per cent in the year to September 2016, which SFD would have you believe.
As detailed in our Bankwest Economic Update on 28th of November, WA’s real gross state product (GSP) grew at a peak of 9.1 per cent in 2011-12, but has since slowed to just 1.9 per cent in 2015-16. The September quarter national accounts do not suggest that it slowed even further in the first quarter of 2016-17. That’s not to say it won’t, though. As the lagged effects of the loss of the high wage jobs generated by the construction phase of the resources boom percolate through the WA economy, the household consumption that accounts for 40 per cent of WA’s GSP will continue to struggle for a while yet. Nevertheless, growth in that key component of SFD/GSP already looks to have troughed, and may have even started to reaccelerate, albeit modestly.
WA’s household consumption even grew a touch faster in the September quarter than it did in the rest of Australia, as growth topped out in NSW and Victoria.
The modest acceleration in household consumption may not last as the downturn in dwelling construction takes hold, but it is at least consistent with the idea that the intensity of the drag on WA’s economy from the transition to the production phase of the resources boom may be losing a bit of sting.
When analysing the national accounts for Australia as a whole, the data for the September quarter do not capture what looks very likely to be a bumper grain harvest nationally, which is likely only to be tempered by low prices – because the lucky country isn’t the only one about to harvest a lot of grain.
If not for widespread frosts in WA’s southern grain growing belt in September, it would probably have been a record winter harvest west of the Nullarbor. It won’t be that now, but neither will it be a fizzer by any means. WA is probably on the verge of fourth good to very good year in a row. While we don’t for a minute assume that means the long-term drying trend in the southern half of WA has been reversed, it was and is a timely, albeit partial offset to the downturn in resource project construction.
Any questions please feel free to contact Bez Esquivel.
This information is provided to you by Alan Langford (Chief Economist, Bankwest) (Date: 12 December 2016)