Chief economist update: Economy slows to decade low but still tops the pops

There were no back-patting and self-congratulatory remarks this time from Australia's Prime Minister and Treasurer for the Australian National Accounts show that it wasn't a "wonderful set of numbers".

Instead, with economic growth slowing to 1.4% in the year to the June quarter - it was a woeful set of numbers, the slowest annual growth rate in 10 years.

More disturbing, take away the 0.5 percentage point contribution from "government consumption" to the 0.5% quarterly GDP growth rate and the economy would have grown by zilch (0%).

Factor in the 0.3 pps contribution from imports - an addition to GDP because imports dropped by 1.3% "across the board with declines in all major categories", according to the ABS) but at the same time, indicative of weakening domestic demand - and the June quarter GDP growth would have been negative.

It's not surprising therefore that both Prime Minister Scott Morrison and Treasurer Josh Frydenberg are talking their heads off rationalising the woeful set of numbers under their watch.

As per Frydenberg: "Significantly, these numbers do not incorporate the passage through parliament of the most significant tax cuts in more than 20 years and the full impact of the RBA's decision to reduce interest rates by 50 basis points".

As for the Prime Minister, he doesn't see Australia heading for a recession and that Australia is doing relatively well relative to other countries.

He is correctamondo! Australia's June quarter growth of 0.5% tops those of the G7 countries: Canada (0.9%); (France (0.3%); Germany (-0.1%); Italy (0%); Japan (0.4%); UK (--0.2%); and level pegging with the US (0.5% -- annualised quarterly growth rate of 2.0% divided by 4).

To be sure, these are all dated figures - we're nearly at the end of the third quarter of 2019 - but forward indications from the major components of GDP (C+I+G+X-M) suggest, we'll be right mates!

C for consumption. The stabilisation in the Australian property market (if it persists) plus the tax cuts plus lower interest rates plus still low unemployment (albeit, lacklustre wage growth) should strengthen household spending going forward.

I for investment. Reduced borrowing costs for businesses (lower official cash rate) could encourage increased capital expenditure - evident in the 14.9% increase in capex intentions for 2019/20 in estimate 3 of the capex survey from estimate 2 - as well as the stabilisation in the property market. However, this remains a big if given the general economic - domestic and international - affecting businesses.

G for government. Lower borrowing costs for the government (declining bond yields) and the infrastructure plans already in the pipeline are certain to boost government's contribution to GDP in the coming quarters. However, this could be limited by the government's obsession in achieving that ever-elusive Budget SURPLUS.

X-M for exports minus imports. Australia should be lauded for expanding its exports (up 1.4% in the June quarter) amid the global economic slowdown and the lingering US-China trade war, among others.

As for imports, the Australian dollar's depreciation is working its magic on the domestic economy by encouraging Australians to buy "Made in Australia" products and services and "staycations".

Certainly, it's a challenging global and domestic environment but current indications are that we have seen the low in this economic cycle.

More so, given that major central banks and governments are now hard at work enacting and/or preparing counter-cyclical policy responses.

We'll be right mate!

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