Aussie Q3 GDP growth slows

Emily Nicol
Chris Scicluna

Overview:
With the House having approved a version of the Uighur bill that would call for sanctions against senior Chinese officials linked to Xinjiang, China’s MoFA stating that the US would “pay a price” for it, and Donald Trump yesterday having stated that “In some ways it’s probably better to wait until after the election for the China deal” while also upping his trade threats against the EU, most Asian equity indices have inevitably been in retreat today. So, for example, while the yen locked in its gains of the past couple of days and it was a quiet day for local economic data, the Nikkei 225 fell a little more than 1.0%. The Hang Seng is also currently down more than 1.0%. China’s CSI300, however, closed little changed while the PBoC allowed the RMB to depreciate the most since August in its daily fix and the Caixin services PMI tallied with the equivalent official Chinese index with a rise in November to the highest since March.

In the bond markets, after USTs rallied in the course of yesterday, 10Y USTs are currently close to 1.70%, little different to yesterday afternoon European time but about 14bps lower than this time yesterday. JGBs opened significantly higher, but 10Y yields are currently only 2bps lower close to -0.06% as speculation persists as regards to the size of the government’s imminent fiscal stimulus package. Having sold off over the previous couple of days, ACGBs played catch up with USTs, rallying to leave 10Y yields down about 13bps close to 1.06%. A slight downside surprise to the latest Aussie GDP data provided an additional impulse (more on all of today’s data below).

Japan:
While Japan’s final manufacturing PMI survey released earlier this week offered a modest upwards revision to the headline index in November (up 0.3pt to a still-low 48.9), today’s equivalent services PMI was nudged slightly lower from the flash estimate. However, despite the 0.1pt downwards revision, the headline activity index was still 0.6pt higher than October at 50.3. Admittedly, this is merely consistent with stagnation in the sector last month and leaves the services PMI so far in Q4 trending 2.6pts lower than the Q3 average. Moreover, the services PMI excludes the retail sector, for which the initial sales figures following October’s consumption tax hike implied an even steeper pace of decline than that following the previous tax hike in April 2014. Overall, the composite PMI was 0.7pt higher in November (a touch weaker than initially estimated), albeit at a still-contractionary 49.8. But while this left the index on average so far in Q4 1.8pts lower than the Q3 level – and therefore consistent with a sharp contraction in Q4 GDP – this is a significantly smaller decline than seen in the equivalent period after the 2014 tax hike (-5.1pts), further supporting the view that the negative impact of the tax hike on the economy should be less significant this time around.

China:
While the excitement surrounding the improved manufacturing PMI – the government’s index rose 0.9pt to 50.2, while the Caixin index was up just 0.1pt to 51.7 – earlier this week appeared to be overdone, today’s Caixin services survey also offered more optimism regarding economic conditions in November. In particular, the headline activity index rose 2.4pts to 53.5, a seven-month high. As such, the composite PMI also posted a sizeable gain in November, by 1.2pt to 53.2, a twenty-one-month high, to leave it on average so far in Q4, more than 1pt higher than the average in Q3. This contrasted a little with the overall message from the government’s official composite PMI, which, despite the 1.7pt increase in November still left the index trending slightly below the Q3 average. And we would certainly not jump to conclusions based on these November’s indices – a rebound in activity following October’s national holidays and PRC 70th Anniversary celebrations was inevitably, while the early timing of the Lunar New Year in January would also suggest that many firms will have front-loaded work last month.

Aussie:
In Australia, the main focus today was the ABS’ release of Q3 GDP figures. And these fell short of expectations, with headline growth slowing 0.2ppt to 0.4%Q/Q a touch weaker than trend. But with output having been revised slightly higher in Q219 and Q418, this still saw the annual growth rate tick up slightly in Q3 to 1.7%Y/Y, nevertheless still the second-weakest reading for a decade. Within the detail, with export volumes having increased (0.7%Q/Q) and imports having declined (-0.2%Q/Q) net trade provided a positive contribution to GDP for the third consecutive quarter to account for half of the overall expansion in Q3. Private sector stock building also offered some support for the first quarter in three (0.1ppt).

But while government spending rose for the fifth consecutive quarter – admittedly growth of 0.2%Q/Q was much softer than in Q2 – to leave it up a solid 6%Y/Y, final domestic demand was on the whole very subdued in Q3. Indeed, household consumption increased just 0.1%Q/Q, 1.2%Y/Y, to match the lowest growth since the height of the Global Financial Crisis. Private investment also remained very weak, down for the sixth consecutive quarter (-0.7%Q/Q) to leave the annual rate of decline (-4.8%Y/Y) at its steepest for three years. And while this in part reflected ongoing struggles in residential construction, there was also the largest quarterly drop in spending on machinery and equipment for four years. Against this backdrop, the RBA’s expectation that business investment will help to shift growth onto a higher profile in the final quarter of 2019 and throughout the coming year too, seems far too optimistic. And with household spending still subdued and risks to the global outlook still skewed to the downside, we maintain our view that the RBA will need to revise down its economic forecasts when it next meets in February.

Euro area:
The main economic focus in the euro area today will be the final services and composite PMIs for November, for which the flash estimates suggested further weakening of momentum despite the better showing in manufacturing. In particular, the flash services PMI fell 0.7pt to 51.5 the lowest level since January. And while the final manufacturing index was nudged slightly higher, it seems likely to remain consistent with a slowdown in economic growth so far in Q4.

UK:
Like elsewhere in Europe, the data focus in the UK today will be final November services and composite PMIs. The flash services survey surprised on the downside, with the headline index declining 1.4pts to 48.6. So, despite the modest upwards revision to Monday’s manufacturing survey, the final composite PMI will likely remain firmly in contractionary territory (albeit a touch firmer than the flash estimate of 48.5), at its second-lowest level since the Global Financial Crisis.

US:
Following Monday’s very weak manufacturing ISM, a key economic focus in the US today will be the equivalent non-manufacturing ISM. Expectations are for the headline index to have edged slightly lower in November, to a level still above the near-three-year low reached in September nevertheless still maintaining a steady downwards trend. Ahead of Friday’s comprehensive labour market report, today will also bring the ADP employment figures for November.

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