David Bassanese
3 minutes reading time
At first glance, today’s softer-than-expected 0.4% rise in GDP over the September quarter could be read as a sign the economy lost momentum after the more upbeat 0.7% growth seen in June.
But look beneath the surface and the story is considerably stronger than the headline implies.
Why? Because aside from a moderation in household consumption growth to a more trend-like 0.5% (down from a punchy 0.9% in June), most other components of demand actually strengthened.
Business investment firmed notably, rising 3.6% after a 0.1% decline in June. Dwelling investment lifted 1.8%, up from 0.4% previously. Public demand also rebounded strongly, growing 1.1% compared with just 0.1% in the prior quarter.
Put together, total domestic demand expanded a solid 1.2%, more than double June’s 0.5% pace.
So why the soft GDP print?
The principal culprit was an inventory rundown. The lift in demand appears to have outpaced the ability of firms to supply it, forcing businesses to meet customer needs by dipping into stock. Inventories subtracted 0.5 percentage points from GDP, after a flat contribution in June.
From the Reserve Bank’s perspective, this combination of broad-based demand strength and an inability of production to keep up hints at the economy pressing against inflation-prone capacity constraints.
Accordingly, the RBA will likely take little comfort from the slower headline GDP figure. If anything, the weakness reflects supply limits, not falling demand. And because depleted inventories will need replenishing, the economy enters the December quarter with decent underlying momentum.
Overall, today’s result reinforces the idea that economic demand has not only turned the corner but is broadening – with rising business investment joining ongoing strength in consumption, housing activity and public spending. The fact that production couldn’t keep pace is not a sign of softness but rather a sign of potential excess demand pressures. That, in turn, that adds to the chances that more of the recent inflation pickup reflected rising demand/capacity constraints rather than temporary factors.
The implication: today’s GDP report likely reduces, rather than increases, the RBA’s inclination to cut rates anytime soon.
Of course, the RBA could still cut rates next year – if the pace of annualised monthly inflation gains convincingly drifts back into the 2–3% target band. But even then, given signs of strengthening demand and potential capacity contraints, the Bank might now be increasingly reluctant to add further stimulus, even if inflation behaves.
Meanwhile, with clearer evidence of a broad-based pickup in demand, the risk that inflation remains sticky has increased, along with the possibility that the next move in rates is up, not down.