This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2138618-050543271.html
Oz economy: The good, the bad and the ugly
The Australian economy continues to grow, but the pace of expansion remains moderate, being constrained by ongoing weakness in household spending and a slide in housing construction. The good news is further evidence of an upturn in private business investment and stronger growth in public sector infrastructure spending which is providing support for the economy.
At face value, 2.8 per cent annual GDP growth rate is quite good, but the devil in the detail on how that growth has been registered is why there are some concerns about the sustainability of the expansion as 2018 looms.
Household spending remains mired with growth of just 0.1 per cent in the September quarter. It seems the very low wage growth evident in recent years, plus data showing a small rise in the household saving rate, is keeping consumer spending in check.
Making up well over half of GDP, household spending will be the vital element of the economy into 2018. If wages growth remains weak, there seems little prospect of a pick up in household spending. And if household spending remains weak, bottom line GDP growth will be relying on a strong expansion in business investment and public sector demand.
Consumers are also under some threat by the fall in house prices which is underway in Sydney. While a moderation in house prices is desirable and indeed, a target from a range of recent policy decisions, if prices slow too much or fall away sharply, highly indebted households will feel even under greater pressure and further restrain their spending.
It is noteworthy that in Perth, where house prices have fallen by around 10 per cent over the past three years, consumer spending and new dwelling construction has been falling sharply, driving the Western Australian economy into recession. House prices matter for sentiment, wealth and spending.
With Sydney prices down 1.6 per cent in the past three months, there is a growing risk of a negative impact on consumer spending into 2018.
In terms of the good news on business investment, the non-mining sector is starting to ramp up their expansion plans. The business sentiment surveys from Illion and NAB are showing business confidence at multi-year highs. The capital expenditure plans in the ABS survey points to a moderate lift in investment into 2018.
Helping this is strong growth in public infrastructure spending, including projects that are likely to continue adding to growth over several years. State governments in particular, are responding to the need for public transport, roads and the provision of power, all of which are going to add to new economic activity.
At the end of the day, the economy seems set to grow by around 2.25 to 2.75 per cent in 2018 with different sectors experiencing sharply contrasting fortunes. Soft consumer spending with strong business investment is likely to be the order of the day.
The economy will not be growing fast enough to see much more of a reduction in the unemployment rate which will keep wages growth in check. This looks to be the unfolding story of the economy which will keep pressure on the RBA to keep monetary policy easy and should encourage the government not to tighten fiscal policy in its budget in May.