12 December 2016
Over the past week Australian shares were 1.8% higher. Shares in developed countries were 2.4% higher with the US market up 2.5%. Shares in emerging markets lost 1.7%. The Australian dollar was unchanged at 74.57 US cents. The 10 year bond yield in Australia was 0.06% lower at 2.80% while in the US, the 10 year bond yield closed the week 0.02% higher at 2.40%. The oil price lost 1.4% to 50.96 US dollars per barrel.
Some significant economic news was released last week: Australia’s economy contracted by 0.5% during the September quarter. As shown below, negative growth results have been few and far between, this is only the fourth quarter in the last 25 years. This result seemed to create a frenzy amongst the media regarding the risk of a recession. Meanwhile competing politicians attempted to win the high ground on who has the better economic growth strategy and credentials.
Note: the technical definition of a recession is two consecutive quarters of negative returns.
What drove the negative result? The largest driver appears to be a sizable drop in government investment. We also imported more which counts towards the GDP of other countries, not our own, offsetting a small increase in exports. Business and dwelling investment fell a little, partly offset by household spending which actually increased.
Should we be concerned about the economic outlook for Australia? First of all, note that we previously felt that the reported economic growth numbers appeared to be too high relative to the pressures faced by the economy. This quarterly result probably swung too much the other way, understating the resilience of Australia’s economy due to the impact of some noisy factors. The largest detractor, government investment, is highly volatile. It was down 10.4% this quarter but up 16.8% the previous quarter.
Overall the recent GDP results are a reality check. Australia’s economy faces some challenges, namely replacing the tailwinds of mining investment along with some risks to building investment. However Australia’s economy has some positive drivers including low interest rates and improving terms of trade due to higher resource prices. This makes it unlikely, but possible, that we’ll slip into a recession in the near term.