Aus GDP ends 2012 OK, big challenge for 2013 remains

GDP growth came in line with expectations at 0.6%YoY and 3.1%YoY.  As expected, the backbone of this was strong export growth, although some of this was driven by destocking from mines and ports.  Domestic demand was slow, with not much happening in consumption or investment.

Looking at quarterly contributions to growth is a bit misleading on the investment side, as the a change in ownership of the Victorian desalination plant makes the swings in public and private investment look huge, when in reality its a wash.

The contribution from domestic final demand of 0.3ppt follows a zero in the September quarter, with the last 3 months about as weak as it gets for domestic final demand outside a recession.

Luckily the dividends of investment are coming through with exports lifting.  Because some of this was driven by destocking, its hard to know what net exports will look like in Q1 next year when taking into account inventory movements.  On the domestic consumption side, housing and consumption might be a touch better, although not radically so.

Looking at the bigger picture 3.1%YoY growth is pretty good, with 2.5% annualised over the last 6 months not disastrous. So the Australian economy has managed a transition in the drivers of growth to date without suffering terribly.

Consumption has been contributing less to activity than prior to the financial crisis as households consolidate balance sheets.  But the big drag from net exports has been reversed.

Government investment has also pulled back after the big surge during the crisis, with the gains in the current quarter more about accounting than growth.

Private sector investment has been providing a strong contribution to growth through mining investment, although is starting to provide less to growth. Again, the data in the last quarter are impacted by an ownership change of assets.

The challenge now is that the light blue part of the chart is going to shrink further and more rapidly and its not clear how much of an offset the economy will get from elsewhere.

While interest rates have been cut quite a bit, the impulse on activity has not been very big.  And I think the reduction in capex plans is much more concerning than most analysts have interpreted from the latest capex survey (see this post).  Subsequently it seems likely to me that growth will be quite a bit lower than current rates over the next 12 months.

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