(Bloomberg) -- Australia’s economy slowed in the final quarter of 2018 as a deepening property slump hurt construction and consumption remained subdued, with government spending the key support.
The data confirm an economic contradiction Down Under: while growth slowed sharply in the second half of last year, firms kept steadily hiring and investing. The growing divide between weak GDP and unemployment that’s fallen to 5 percent was noted in a speech earlier Wednesday by central bank chief Philip Lowe, who has kept interest rates unchanged at a record low since 2016.
“The economy lost considerable momentum in 2018, slowing from around a 4 percent annualized pace in the first half of the year to around a 1 percent pace in the second,’’ said Andrew Hanlan, a senior economist at Westpac Banking Corp. “This was centered on housing and the consumer against the backdrop of a further tightening of lending standards and persistent weak wages growth.’’
The Reserve Bank is honing in on household spending, which accounts for almost 60 percent of GDP. It’s remained subdued for the past two quarters amid signs that consumers are holding back in response to falling property prices and persistently weak wages.
Wednesday’s data showed the household savings ratio edged up to 2.5 percent from a revised 2.3 percent, suggesting Australians are salting away a bit more cash as their paper wealth declines.
The Australian dollar fell after today’s release, buying 70.60 U.S. cents at 12:52 p.m. in Sydney compared with 70.88 before the report.
Money markets are pricing in a likely rate cut by the end of the year. Westpac Chief Economist Bill Evans and Nomura Holdings Inc.’s Andrew Ticehurst recently switched to predicting two cuts by year’s end.
Jobs Strength
Lowe has rejected the argument that the discrepancy between hiring and economic growth is because employment is a lagging indicator, pointing to record high job vacancies and RBA liaison with employers that supports a solid outlook for the labor market. For a rate cut to happen, it will require unemployment to begin rising.
Australia’s economy would’ve been in a worse position if not for the strength of public spending. Both national and state governments have opened their check-books as lower unemployment boosted the tax take and reduced expenses. The building of roads, bridges and railways has supported growth.
But a 3.4 percent decline in dwelling investment, which cut 0.2 percentage point from growth, suggests that the pipeline of residential projects that’s boosted employment could shorten as developers bow to the reality of insufficient demand and excess supply.
Overshadowing this is a looming budget next month and a likely election in May. The government is expected to shower tax cuts on the electorate to try to win over voters as opinion polls show the opposition Labor party on track to win office. At the same time, recent history suggests that firms tend to hold off on hiring near elections.
