What today’s GDP number means for investors

Australia’s economy went backwards in the third quarter of 2016 to the tune of 0.5%, much worse than economists had forecast (guessed).

Gross Domestic Product (GDP) fell 0.5% in the September quarter compared to the June quarter, although it was still up 1.8% compared to the previous year. It was the first fall in five years – since the Queensland flood-affected March 2011 quarter – as you can see from the chart below.


Source: ABS


Among the factors contributing to the fall was an 11.5% decline in new building investment – its strongest quarterly fall since September 2009.

Mining investment continues to sink as the shadow of the mining boom looms ever larger. It was the twelfth consecutive quarter of declining mining investment. The problem for the Australian economy is that non-mining investment is not growing enough to counteract the fall.

Construction output also declined, with falls in all three sub-divisions of building construction, heavy and civil engineering construction, and construction services. It seems fairly clear from several sets of data that Australia’s building boom is over as well.

AMP Capital economist Shane Oliver believes that Australia is unlikely to enter a recession – defined as two consecutive quarters of negative GDP – with growth likely to bounce back in the December quarter. Much of that will depend on consumers and retail sales over the Christmas period.

The negative GDP number does raise issues for the Reserve Bank of Australia (RBA) and monetary policy. Will the central bank cut the official cash rate from its current 1.5% to stimulate growth? That seems unlikely, with a 0.25% cut unlikely to be enough to do much of the heavy lifting.

Banks have already started raising their fixed-term home loan rates as well as some variable rate investor mortgage products in a sign that they think the RBA has finished cutting rates, and the next move will be up.

The Australian dollar has also fallen today, currently buying 74.3 US cents. That may allow the RBA to sit on the current cash rate for as long as necessary. The lower Australian dollar is good news for exporters and those companies with foreign income like Flight Centre Travel Group Ltd (ASX: FLT), Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL).

Foolish takeaway

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Motley Fool writer/analyst Mike King owns shares in Flight Centre, Cochlear and CSL. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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