Monthly Bulletin of Economic Trends: Economic Activity in ... · economic activity, as measured by year-ended SFD growth, is slowing across most major states, except for WA which

MELBOURNE INSTITUTEApplied Economic & Social Research

Monthly Bulletin of Economic Trends:Economic Activity in the Major States

October 2019

Prepared by G. Lim and V. Nguyen, Macroeconomics@MI. Data in this report were finalized on 17/10/2019.

Economic Activity in the Major States

Three rate cuts in five months … but consumer confidence remained low

• The Reserve Bank of Australia (RBA) decided at its monetary policy meetings on the 1st of

October to lower the cash rate further by 25 basis points following similar decisions in June

and July. The RBA statement indicated that its decision is “to support employment and

income growth and to provide greater confidence that inflation will be consistent with the

medium-term target. The economy still has spare capacity and lower interest rates will help

make inroads into that.”

• The Westpac-Melbourne Institute Consumer Sentiment Index has proven to be a timely and

useful gauge of consumers’ reactions to the RBA’s decision. Figure 1 provides the readings

of the Australian consumer sentiment in May (prior to the RBA’s three recent rate cuts), in

September (prior to the latest rate cut) and in October (post rate cuts). It shows that

consumer confidence across Australia has worsen markedly since May, in spite of the RBA’s

three rate cuts amounting to 75 basis points in total. Figure 1 also shows that the RBA’s

October rate cut did little to ease consumers’ concerns about future conditions.

• Empirical research suggests that it may take time for the effects of the RBA’s rate cuts to

gain traction on economic activity. In the meantime, consumers’ pessimism about future

conditions could put downward pressure on consumption and hence further downward

pressure on economic activity – this is a nonnegligible downside risk.

Figure 1: Consumer sentiment before and after the RBA’s three rate cuts

Source: Melbourne Institute

• Consumer sentiment: consumers appear to be downbeat despite RBA’s third rate cut

in five months.

• June-2019 State accounts: economic activity continued to weaken in most major

states, as foreshadowed by the Melbourne Institute State Leading Indexes of Economic

Activities.

• State leading indexes of economic activity: economic activity across the major states

is likely to remain below-trend in the first half of 2020.

Monthly Bulletin of Economic Trends – October 2019

Risks are all on the downside…

• The Australian Bureau of Statistics’ National Accounts for the past three quarters show that

economic activity, as measured by year-ended SFD growth, is slowing across most major

states, except for WA which is still contracting but at slower rates. Figure 1 charts the year-

ended SFD growth in the past three quarters and demonstrates that economic activity across

the major states is converging, albeit to a lower level of economic activity.

Figure 2: State Final Demand (% year-ended growth)

Source: Australian Bureau of Statistics.

• Weaker growth in private consumption and investment are among the key factors leading to

weaker economic activity across the major states. Weak income growth and high housing

debts (and hence repayments) among households across Australia have put downward

pressure on household consumption. Weaker domestic activity and rising uncertainty from

oversea conditions have also put downward pressure on private investment.

• Figure 3 plots the capital expenditures in the major state economies over the past three

quarters. Apart from SA, growth in capital expenditure is either weaker or negative in the

other major states. Given the uncertainty around Brexit and the ongoing US-China trade war,

the outlook for capital expenditures in the major states is unlikely to improve in the near

term. With ongoing weaknesses in both household consumption and capital expenditures,

risks are all on the downside for activity across the major states.

Figure 3: Capital Expenditures (% year-ended growth)



State accounts: economic activity weakened further in most states

• The latest Australian Bureau of Statistics’ National Accounts showed that State Final

Demands (SFDs) grew in just two out of the five mainland states in June. WA recorded the

strongest quarterly SFD growth of 0.8%, followed by VIC (up by 0.5 per cent). In contrast,

NSW and QLD SFDs were unchanged in the June quarter while SA SFD declined by another

0.2% following a 0.2% decline in March

• The strong quarterly SFD growth in WA was driven mainly by strong increases in both WA

public and private investment (up by 3.1% and 3.3%, respectively). Importantly, this was

the first quarterly increase in WA’s private investment after contracting for 9 consecutive

quarters since March 2017. The moderate quarterly growth in VIC SFD in June was mainly

attributable to increases from VIC public consumption and investment (up by 4.2% and

3.9%, offsetting negative influence from declining private investment (down by 3.2%).

• Quarterly declines in both public and private investments were key to no growth in NSW and

QLD SFDs as well as the decline in SA SFD in the June quarter. In particular, QLD private

investment fell by 5.5% in June - the third time in the last four quarters or by 12.3% when

compared to this time last year.

• In year-ended terms, VIC still leads with a 1.9% SFD growth, followed by NSW (up by 1.3%),

QLD (up by 0.4%) and by SA (up by 0.4%). WA SFD declined again, though at a much more

moderate year-ended rate of 0.1% in June as compared to -1.6% in March and -1.8% in

December 2018.

• Figure 4 provides the contributions to year-ended growths in SFDs of the major states. It

shows notably weaker contributions from private consumption to NSW and VIC activity, and

considerable negative influence from private investment on QLD activity in the last 12

months.

Figure 4: Contributions to year-ended growth in SFDs (percentage points)



State Leading Indexes: growth remains below trend across major states

• The Melbourne Institute State Leading Indexes have signalled below-trend activity across

major states since the second-half of 2018. Latest readings of the Indexes in Figure 5

continue to indicate below-trend activity across the board in the next six months or so.

Figure 5: State Leading Indexes (year-ended deviation from trend growth, %)


• Table 1 provides the year-ended deviation from trend growth in the State Leading Indexes

as well as the contributions from each component. Weakness in retail trade is the major

detractor to growth in all major states reflecting the weakness in household consumption.

Weakness in housing market is the other major detractor to growth across the major states,

especially in NSW, QLD, and VIC. The combined contributions of dwelling approvals and

housing finance commitment subtracted 0.83 ppts off NSW growth, 0.71 ppts VIC growth,

0.8 ppts QLD growth, 0.4 ppts SA growth and 0.26 ppts WA growth.

• The negative contributions of the yield spread, the difference between the 10-year

government bond rate and 90-day bill rate, indicates that market participants are expecting

weaker economic growth in the medium to the longer terms. The highly anticipated RBA rate

cut occurred on the 2nd of October. Growth might pick up a little as the three rate cuts

gradually impacts economic activity, but it is very likely to remain below-trend across the

states in the next two quarters.

Table 1: Contributions of to Year-end Growth in State Leading Indexes

Oct-2019 NSW VIC QLD SA WA

Monthly level 0.00 0.00 0.00 0.00 0.00

Monthly growth -0.19 -0.08 -0.15 -0.15 -0.01

Year-ended growth -1.57 -1.46 -1.10 -1.52 -0.92

Westpac-MI CSI expectations index -0.06 -0.08 -0.03 -0.09 -0.04

Westpac-MI UE index -0.09 -0.06 0.04 -0.09 -0.02

Aggregate monthly hours worked 0.26 -0.03 0.09 -0.14 -0.12

Retail trade -0.57 -0.26 -0.10 -0.41 -0.25

Dwelling approvals -0.58 -0.46 -0.47 -0.25 -0.15

Housing finance commitment -0.25 -0.25 -0.33 -0.15 -0.11

Current family finance index -0.04 -0.06 -0.03 -0.07 0.00

AUD/USD -0.11 -0.11 0.01 -0.13 0.01

Yield spread -0.15 -0.15 -0.11 -0.18 -0.09

RBA commodity prices AUD -0.15 -0.13


-2

-1

0

1

2

NSW VIC QLD SA WA

-1.6 -1.6

-1.3-1.5

-1.0 -1.1-1.3

-1.5

-0.9 -0.9

August-2019 September-2019


Forecasts for Key Macroeconomic Variables in Major States

• Figure 4(a) provides the Melbourne Institute forecasts for the year-end SFD growth in the

June quarter together with the actual outcomes released by the ABS. These forecasts were

based on information from the Melbourne Institute State Leading Indexes of economic

activity. The figure indicated that economic activity in NSW, VIC, QLD and SA was a little

weaker than suggested by information from the State Leading Indexes. Meanwhile, economic

activity in WA contracted a little less than forecasted by the WA State Leading Index, though

it is still contracting, according to the latest read.

• Going forward, we forecast year-ended growth in SFDs across the major states to decline a

little further before gradually picking up towards the end of 2020. Year-ended SFD growth is

forecast be strongest in VIC in the coming quarters, around 1.6% at the end of 2019 and

rising towards 2.7% in the second half of 2020. Forecasts for NSW and SA SFD growth follow

a similar path over the next several quarters, under 1.0% at the end of 2019 and rising

towards 1.0% in the second half of 2020. QLD SFD growth is forecast to gradually pick up to

just under 2.0% in the second half of 2020. Meanwhile, WA SFD growth is likely to remain

in the negative territory for another quarter before picking up in the second half of 2020.

• Labour market conditions are likely to be more moderate across major states with varying

rates of employment growth and unemployment. Employment growth is forecast to slow

further in most major states except for WA. We forecast year-ended employment growth to

be strongest in VIC over the next three quarters, though gradually declining from 3.0% at

the end of 2019 to just above 2.0% in the second half of 2020, other things being equal.

Employment growth in NSW, QLD, and SA is forecast to decline, to just under 2.0% by mid-

2020 for NSW and QLD, and to around 1.0% for SA over the same period. In contrast, WA

employment growth is forecast to pick up gradually in the next several quarters towards

1.5% in the second half of 2020.

• With the updated information in the State Leading Indexes in October, forecasts for the year-

ended SFD growth rates in the whole 2019 have been revised downwards in all the major

states from the corresponding forecasts produced in July. The forecasts are consistent with

below trend economic activity across the major states as signalled by the State Leading

Indexes.

Figure 6 State Final Demand Forecasts (%, year-ended growth)

Source: Australian Bureau of Statistics and Melbourne Institute


Figure 7: Consumer Sentiment Indexes and State Leading Index

(3-month moving averages of CSIs and year-ended growth in the State Leading Index)

Note: The figure plots the 3-month centered moving averages of the Westpac-Melbourne Institute Consumer Sentiment

Indexes and the 3-month centered moving averages of the year-end deviation-from-trend growth of the Leading Indexes

for NSW, VIC, QLD, SA and WA. Source: Melbourne Institute. The State Leading Indexes combine the latest information

from consumer expectations on future activity and unemployment, current family finance, aggregate monthly hours

work, retail trade, dwelling approvals, housing finance commitments, AUD/USD exchange rate, the yield spread and

RBA’s $A commodity price index (for QLD and WA only).


Table 2: Outlook for Australia1

1: Actual in black and forecasts in blue; values in parentheses are quarterly growth rates. 2: As measured by the Reserve Bank’s trimmed mean measure of inflation. 3: Average over last month in quarter. 4: Average of 3-months in the quarter. 5: Calculated from quarterly employment numbers that are averaged over the 3 months in the quarter.

Actual Forecast

2018 2018 2019 2019 2019 2019 2020 2020

Sep Dec Mar Jun Sep Dec Mar Jun 2018/19 2019/20

Economic Activity

GDP 2.6 2.2 1.7 1.4 1.9 2.4 2.4 2.5 2.0 2.3

(0.3) (0.1) (0.5) (0.5) (0.8) (0.6) (0.6) (0.6)

Household Consumption 2.6 2.0 1.8 1.4 1.5 1.6 1.8 2.0 1.9 1.7

(0.3) (0.4) (0.3) (0.4) (0.4) (0.5) (0.5) (0.6)

Private Dwellings 7.0 3.2 -2.3 -9.1 -11.5 -11.2 -11.2 -8.9 -0.4 -10.7

(0.1) (-2.8) (-2.2) (-4.4) (-2.5) (-2.5) (-2.3) (-2.0)

New Business Investment -1.2 -0.8 -1.6 -1.6 0.4 0.8 2.0 4.0 -1.3 1.8

(-1.6) (0.4) (0.0) (-0.4) (0.4) (0.8) (1.3) (1.5)

Domestic Final Demand 2.5 2.0 1.2 1.0 0.8 1.1 1.5 1.8 1.7 1.3

(0.4) (0.2) (0.1) (0.3) (0.2) (0.4) (0.5) (0.6)

Imports of Goods & Services 2.0 1.2 -0.7 -2.8 -1.2 -1.0 -0.5 1.5 -0.1 -0.3

(-1.5) (0.1) (-0.2) (-1.3) (0.2) (0.3) (0.4) (0.6)

Exports of Goods & Services 3.9 4.9 2.2 2.9 3.8 5.4 4.3 3.5 3.5 4.3

(0.3) (-0.7) (1.9) (1.4) (1.2) (0.8) (0.8) (0.7)

Underlying inflation2 1.7 1.8 1.6 1.5 1.6 1.5 1.6 1.6 1.7 1.6

(0.4) (0.5) (0.3) (0.4) (0.4) (0.4) (0.4) (0.4)

Headline Inflation 1.9 1.8 1.3 1.6 1.9 1.6 2.0 1.8 1.6 1.8

(0.4) (0.5) (0.0) (0.6) (0.7) (0.3) (0.4) (0.4)

90-day Bill Rate3 2.0 2.0 1.9 1.5 1.0 0.9 0.9 0.9

Trade Weighted Index4 62.6 62.0 60.9 60.2 59.1 58.9 58.9 58.9

$A/$US rate (100)4 0.73 0.73 0.72 0.70 0.70 0.67 0.67 0.67

Labour Market

Unemployment Rate4 5.2 5.0 5.0 5.2 5.3 5.4 5.4 5.3 5.1 5.4

Employment Growth Rate5 2.4 2.3 2.2 2.5 2.5 2.2 1.9 1.7 2.4 2.1

(0.6) (0.6) (0.6) (0.6) (0.6) (0.4) (0.3) (0.4)

Participation Rate4 65.5 65.6 65.7 66.0 66.2 66.3 66.3 66.3 65.7 66.3

Wage Price Index 2.3 2.3 2.3 2.3 2.2 2.2 2.2 2.1 2.3 2.2

(0.6) (0.5) (0.5) (0.6) (0.5) (0.5) (0.5) (0.5)

Inflation & Financial Market

Financial Year

Actual Forecasts


Table 3: Actuals and Forecasts for Major States

Actual Forecasts Calendar Year

Sep Dec Mar Jun Sep Dec Mar Jun Actual Forecast

2018 2018 2019 2019 2019 2019 2020 2020 2018 2019

NEW SOUTH WALES

State Final Demand 3.8 2.1 1.8 1.3 0.6 0.7 0.8 1.2 3.3 1.1

(1.2) (-0.3) (0.4) (0.0) (-0.1) (-0.3) (0.4) (0.0)

Consumption 2.7 1.7 1.8 1.0 1.0 1.3 1.7 2.2 2.5 1.3

(0.3) (0.1) (0.4) (0.2) (-0.7) (0.1) (0.4) (0.2)

Employment 3.4 3.0 3.4 3.3 3.1 2.3 2.0 1.9 3.5 3.0

(0.6) (0.8) (1.0) (0.9) (0.4) (-2.3) (1.0) (0.9)

Unemployment 4.6 4.4 4.2 4.6 4.4 4.6 4.6 4.8 4.7 4.4

VICTORIA


(0.5) (0.7) (0.1) (0.5) (0.0) (0.9) (0.7) (1.0)

Consumption 3.5 2.9 2.5 1.9 1.8 2.0 2.4 2.9 3.5 2.0

(0.6) (0.6) (0.3) (0.4) (0.5) (0.8) (0.7) (0.9)

Employment 2.7 3.3 3.7 3.7 3.2 2.6 2.4 2.3 2.7 3.3

(1.3) (1.1) (0.8) (0.4) (0.8) (0.6) (0.6) (0.3)

Unemployment 4.7 4.4 4.7 4.7 4.8 4.8 4.9 4.9 5.0 4.8

QUEENSLAND


(-0.7) (0.7) (0.4) (-0.0) (-0.4) (1.1) (0.8) (0.4)

Consumption 2.3 2.2 1.8 2.2 2.2 2.3 2.4 2.5 2.6 2.1

(0.4) (0.8) (0.3) (0.7) (0.4) (0.9) (0.4) (0.8)

Employment 1.8 1.5 0.9 1.7 2.2 1.9 1.7 1.7 2.8 1.7

(0.3) (0.4) (0.2) (0.7) (0.8) (0.2) (-0.0) (0.7)

Unemployment 6.2 6.2 5.9 6.2 6.4 6.3 6.1 6.1 6.2 6.2

SOUTH AUSTRALIA


(-0.1) (0.9) (-0.2) (-0.2) (0.0) (0.9) (0.1) (0.0)

Consumption 1.9 1.1 1.0 0.7 0.7 0.7 0.8 0.8 1.8 0.8

(0.1) (0.3) (0.0) (0.3) (0.0) (0.3) (0.2) (0.3)

Employment 1.4 1.9 0.7 1.6 1.5 1.2 0.7 0.7 2.1 1.3

(-0.2) (0.5) (0.1) (1.2) (-0.3) (0.2) (-0.4) (1.2)

Unemployment 5.6 5.6 6.0 6.0 6.8 6.6 6.6 6.5 5.7 6.3

WESTERN AUSTRALIA

State Final Demand -0.9 -1.8 -1.6 -0.1 -0.1 0.2 0.4 0.9 -0.6 -0.4

(0.3) (-0.6) (-0.6) (0.8) (0.3) (-0.3) (-0.4) (1.3)

Consumption 0.7 0.6 0.7 0.8 1.0 1.1 1.6 2.1 1.1 0.9

(-0.1) (0.5) (0.1) (0.3) (0.1) (0.6) (0.6) (0.8)

Employment 1.2 1.1 0.5 0.9 1.2 1.4 1.6 1.5 1.5 1.0

(0.2) (0.3) (-0.4) (0.8) (0.5) (0.5) (-0.2) (0.7)

Unemployment 6.2 6.2 6.2 6.0 5.8 5.8 5.9 5.9 6.2 5.9


Table 4: Precision of year-ended Forecasts for Australia and Major States

Precision of year-ended forecasts

Sep-2019 Dec-2019 Mar-2020 Jun-2020 2019

NEW SOUTH WALES

State Final Demand 1.2 1.4 1.5 1.6 1.3

Consumption 0.8 1.0 1.0 1.1 0.9

Employment 0.7 0.9 1.0 0.9

Unemployment 0.3 0.4 0.4 0.4

VICTORIA


Consumption 1.0 1.2 1.2 1.3 1.1

Employment 0.6 0.9 1.0 0.8


QUEENSLAND


Consumption 1.0 1.5 1.7 1.8 1.3

Employment 0.8 1.1 1.2 1.0


SOUTH AUSTRALIA


Consumption 0.9 1.1 1.3 1.3 1.0

Employment 0.8 1.0 1.1 1.0


WESTERN AUSTRALIA


Consumption 1.2 1.6 1.7 1.8 1.4

Employment 0.8 1.1 1.2 1.0

Unemployment 0.4 0.5 0.6 0.5 Note: The forecasts and the precisions of the forecasts (in Table 4) are generated using Monte Carlo simulations. The reported forecasts are the means of the simulated samples and the reported precisions are the standard deviations of the simulated samples. Large estimates of the precisions reflect the volatility in actual historical data. For example, actual standard deviation of year-ended SFD growth (in the past 10 years) is around 7.0% in WA and 3.6% in QLD, compared to around 1.3-1.6% in NSW, VIC and SA.

2019 2019 2020 2020

Sep Dec Mar Jun

Economic Activity

GDP 0.6 0.9 1.1 1.2

Consumption 0.5 0.8 1.0 1.1

Dwelling 2.3 2.4 2.5 2.8

Business Investment 5.2 6.0 6.7 7.5

Import 2.5 4.2 5.8 6.6

Export 2.6 3.4 4.0 4.4

Underlying Inflation 0.1 0.2 0.3

Headline Inflation 0.3 0.4 0.5

90 day bill 0.3 0.5 0.7

Trade Weighted Index 3.3 3.7 3.9

Labour Market

Unemployment Rate 0.1 0.1 0.2

Employment 0.1 0.2 0.4

Participation Rate 0.1 0.2 0.3

Wage Price Index 0.5 0.5 0.6 0.7

Precision of (year-end) Forecasts

Australia

Financial Year

2019/20

Inflation & Financial Market

0.6

0.3

0.5

0.3

0.4

0.7

0.7

1.9

4.6

3.7

0.6

2.3

2.9

0.3


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Documents

Monthly Bulletin of Economic Trends: Economic Activity in ... · economic activity, as measured by year-ended SFD growth, is slowing across most major states, except for WA which