Chanticleer
The silver lining in the weakest GDP growth in 30 years
There’s nothing pretty about the slowest economic growth since the 1990s. But tepid GDP growth will keep investor belief in rate cuts and a brighter second half of 2024 alive.
There’s nothing pretty about the latest GDP growth figures, which shows the Australian economy grew at just 0.2 per cent in the December quarter and 1.5 per cent in the last year.
A deepening per-capita recession will do nothing to help weak consumer and business confidence. Excluding the pandemic and the introduction of the GST, this is the weakest growth since the 1990s and is more evidence that the Reserve Bank’s 13 rate hikes are finally doing what they were supposed to do – weaken demand and bring inflation back to heel.
But as investors digest this data, they will have that old market maxim at the front of their mind: the economy is not the sharemarket.
The economy is slowing, but Michele Bullock is taming the inflation dragon. David Rowe
There is no shortage of prominent examples of this right now. The surge in Japan’s equity market to levels not seen in 35 years in recent weeks has investors giddy with excitement – but the Japanese quietly slipped into recession last month. Just four days ago, the Euro Stoxx index hit an all-time high, but the region ended the year with GDP growth sitting at zero.
A big driver of the global equity melt-up underway that we’ve seen since the start of November is, of course, the prospect that central banks will be cutting rates within months, or at least by the end of the year. Wednesday’s weak Australian GDP print will play into a similar theme.
While the RBA will remain rightly concerned about the renewed strength in house prices, the strength in the labour market and the potential stickiness of services inflation (particularly rent), the spending restraint that is flowing economic growth will support further falls in inflation, which is already dropping faster than the RBA has forecasted. A second consecutive lift in productivity will also be cheered by governor Michele Bullock.
Sharemarket brushes off data
It was notable that local equities and bonds largely ignored the GDP data. Traders remain all in on the first RBA rate cut arriving in September, with market pricing implying a strong chance of a second by Christmas. Capital Economics’ local economist, Abhijit Surya, says the GDP data broadly supports the firm’s view that the first cut will arrive in August.
The February reporting season told us that investors in the most consumer-exposed sectors, such as discretionary retail, are looking through the short-term weakness in household finances that the GDP data exposes, including a fall in household spending in real (inflation adjusted) terms and a 1.6 per cent drop in discretionary spending in nominal terms.
Instead, they will remain focused on the fact household incomes are finally rising in real terms (wages rose 4.2 per cent during the quarter and inflation rose 4.1 per cent), stage three tax cuts arrive in July, rate cuts are probably coming and households have plenty of financial firepower, with the savings rate up slightly.
While younger households with big mortgages are obviously doing it tough, spending is being driven by older, wealthier households who are sitting pretty.
Data from UBS economist George Tharenou shows retirement benefits paid in the December quarter boomed about 7 per cent to a record high of $149 billion, equivalent to a 10 per cent share of household income. Despite this, retirement savings still surged 10 per cent year-on-year to a record $3.7 billion; that is a lot of dry powder for consumers to draw on, and adds to belief in a brighter second half to calendar 2024.
While the sharemarket brushed off the data, it will help confirm that some of the drivers of the recent rally remain intact. What growth we did see in the December quarter was driven by the government sector infrastructure spending and private business investment, particularly in non-housing construction, which leapt 5 per cent as money poured into data centres and warehouses.
No wonder the building materials sector has run hot since the start of the November rally, with Reece, James Hardie, Seven Group and takeover targets CSR and Boral up between 40 per cent and 60 per cent over that period.
The spending on data centres and logistics also helps explain the stellar run of Goodman Group (up 51 per cent in the past four months), NextDC (up 42 per cent) and Macquarie Technology (up 30 per cent).
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