Dr Brendan Rynne, KPMG Chief Economist, responds to the 3rd quarter GDP figures
The latest GDP results reaffirm the economy is stuck in slow mode, with both consumption and investment activity treading water and growth predominantly dependent on government spending and export growth.
The national accounts show the public sector purse strings have been loosened virtually across the board with greater amounts of consumption and investment activity occurring across all tiers of government.
While private sector investment continues to be weak, from a composition of growth perspective it didn’t act as a material drag on economic growth in the September quarter, as it has done for the previous 4 consecutive quarters. Positively we saw increased investment activity in non-dwelling construction, biological assets and intellectual property, while declining housing investment continues to pull down aggregate investment activity.
The national accounts also reaffirm the reductions in the cash rate by the RBA are working as expected; both to entice new investment (which is shown through the turnaround in the non-dwelling investment cycle, which arguably bottomed in the middle of the year) and to promote Australia’s exports through competitive foreign exchange settings (exports are up 0.7 percent q/q and 3.3 percent y/y).
It is our experience that low interest rates do help stimulate economic activity and bring forward marginal investment. However, investors tend to do this when they see an improving, or at least stable, economic horizon.
Monetary policy needs to be complemented by tax reform – initially we should consider an investment allowance which would be comprehensive and cover both tangible and intangible property, while in the longer term look to reduce our company tax rate to 25 percent in order to attract foreign investment.
Overall these results confirm the RBA’s previous assessment that the Australian economy has passed through “a gentle turning point” – albeit the rate of growth is more subdued than we have become accustomed to. KPMG Economics has not amended its forecasts set earlier in the year and we continue to expect GDP growth of 1.9 percent for the year ended December 2019, which implies similar growth for the current quarter.
More fundamentally, as a country, we need a comprehensive set of reforms in a wide number of sectors. This should include the whole gamut of human services, particularly health and education. We cannot afford reform stagnation.