Australian GDP is shrinking despite continuing strong business investment. Exports are still surprisingly resilient, but consumption spending has flattened. Signs of the sharp slowdown include the $3.2bn decline in imports for the quarter, house price growth turning negative after another burst of growth in the last year, and a downward turn in labour force participation. Unemployment is beginning to climb again while a slackening in demand is pulling inflation back in line. We expect the Reserve Bank of Australia (RBA) to cut interest rates further at their next meeting in early April.

Australian GDP has finally stumbled into negative territory, contracting by 0.5 percent on a seasonally-adjusted basis in the December 2008 quarter. Overall growth for the quarter, over a year ago, managed to stay positive at 0.3 percent. The largest “contributor” to GDP growth in the quarter was imports, with a sharp fall in the demand for imports keeping the quarterly result from being even worse. The biggest damper on growth was the decline in inventories, as producers responded to lower demand by running down stocks.

Although investment (fixed capital formation) was unable to keep GDP growth in positive territory, it nevertheless held many positives. Business investment was up 12 percent on the same quarter a year ago, while public investment was up 6.8 percent. The resurgence of agriculture continued, with a 14 percent rise in GDP in the December 2008 quarter over a year ago. With significant public investment occurring, construction also achieved 3.5 percent growth over the same quarter a year ago.

With imports falling so rapidly, the current account deficit for the December 2008 quarter looked a lot better than it has for a long time. At -A$6.5bn for the quarter, the deficit was an improvement of $3bn, or 32 percent, on the previous quarter, seasonally-adjusted. Imports fell 6 percent, or $3.21bn in seasonally-adjusted terms during the quarter, while exports fell 1 percent, or $427m.

The downturn in demand for commodities is sending mixed signals. Exports of non-agricultural commodities from Australia rose 9 percent in the December quarter, including a 28 percent rise in demand for coal, and a 14 percent increase in demand for other mineral fuels. However, exports of metal ores and minerals were down 5 percent.

One reason for falling imports will be uncertainty among the workforce (consumption goods imports were down 8.4 percent in the December quarter). Unemployment is on the way up, hitting 4.8 percent in January, an increase of 0.7 points on a year earlier. The participation rate is also stalling after climbing strongly over the previous four years. Presumably this is people leaving the workforce either because they have given up looking for work or thinking that now is a good time to up-skill.

Wages still seem to be rising for those with jobs. Hourly rates of pay were up 4.2 percent on a trend basis in December 2008 over a year before. Mining still enjoyed the largest increase in wages, up more than 6 percent, while the hospitality and communications industries saw rises of under 3 percent.

House price growth has dipped into negative territory (-3.3 percent over the December 2008 quarter). Adelaide and Darwin are the only bright(-ish) spots in a gloomy market. Perth prices were down 6.7 percent on the same quarter a year ago.

As in New Zealand, inflation is coming under control as demand for many products eases around the world. Australia in fact experienced deflation in the December quarter compared with the September quarter, but the CPI was up 3.7 percent over the December 2008 quarter. This is an improvement on the 5 percent reported in the last issue of BERL Forecasts. The biggest decline in prices was in transportation, as oil prices fell, while several categories still saw strong rises in the year. These included financial and insurance services (up 7 percent), housing (6.5 percent), and food (5.6 percent).

The race to see who can cut interest rates the most continues in earnest, with the RBA lopping a further 100 basis points off the cash rate in early February, bringing it to 3.25 percent. Interestingly, however, the RBA held fire in early March, believing the news was not sufficiently grim to justify a cut. One would expect further cuts with the unimpressive results beginning to filter through in unemployment and domestic consumption figures, and now that inflation is not nearly as much of a worry.