The economy shrank by 0.5% in the September quarter and economists now see the Reserve Bank being forced to cut borrowing costs twice in 2017. Follow reaction from Canberra and the markets live
4.58am GMT
We’ll be closing the blog shortly but here’s a summary of the main points of the day:
4.43am GMT
Time for a market update.
The dollar is still down around 0.5% at US74.30c as investors weigh up the increased possibility that the RBA will cut interest rates next year. Perhaps even twice, some think.
4.35am GMT
Steven Knight of the brokerage Blackwell Global has a broader analysis of the outlook for Australia, which he decribes as “vulnerable” because of the 12th successive quarterly drop in private investment.
This highlights the lack of GDP diversity in the Australian economy and the fact that transition of capital to the services and retail industry has been sluggish at best. Australian growth needs to come from spending, investment and increased employment and it’s difficult to see where that is likely to come from with expectations at the currently low level.
Subsequently, today’s GDP release is likely to be seen as a wake-up call to both the markets and the Reserve Bank of Australia. Although the RBA recently elected to keep the cash rate on hold at 1.50% the reality is that the latest round of data all but assures near term rate cuts. My view is that we are likely to see 50bps shaved from interest rates over the next six months in an attempt to provide some much-needed stimulus.
4.14am GMT
The Guardian columnist Stephen Koukoulas agrees with the folk at Capital. He’s just filed his thoughts on the GDP figures and points the finger at policy failures by the Coalition and the Reserve Bank – the former for cutting spending into a downturn in the economy and the latter for failing to spot the threat from deflation quickly enough and leaving rates too high.
Quite obviously, the RBA should have cut interest rates earlier and harder, not least to free up cash flow for the business sector and indebted households but also to take some air out of the Australian dollar, which has been strong against most global currencies.
It should and probably will cut interest rates again but will likely wait until its next meeting in February to do so. Better late than never.
3.57am GMT
Staying with rates, and the number crunchers at Capital Economics reckon that the RBA will be forced to cut the cash rate to 1% next year and the dollar will drop below US70c.
Although they think the economy will get back to growth in the fourth quarter – in line with most expectations – they see borrowing costs coming down again.
This is only the fourth fall in GDP in 25 years, which highlights that the economic backdrop is not consistent with a big rise in underlying inflation. This supports our view that interest rates may fall from 1.5% to 1% next year, which could drag the Australian dollar below US$0.70.
3.45am GMT
Australia GDP contracts for first time in five years - Financial Times https://t.co/UkjxIGN0zH
Australia GDP Sinks 0.5% In Q3 https://t.co/LTwZ6o9BTc
No pressure on next qrtly GDP number then
'#Australia not experienced a recession(defined as 2 consecutive qrts contracting GDP) since H191'
3.41am GMT
The question of where interest rates will go from here is likely to be much debated from now until the next Reserve Bank meeting in February.
Craig James of CommSec said earlier that the GDP print meant that the recent talk of a possible rates hike was off the table. This what he said in his note:
The Reserve Bank warned [on Tuesday] that annual economic growth would slow before it picked up in 2017. That is our expectation also. The economy should grow near its ‘potential’ rate of 3% in 2017. We continue to believe that interest rates will remain on hold in coming months. But no one will be thinking of rate hikes any time soon.
3.27am GMT
The Coalition will be desperate to avoid Australia entering a slump with another negative print for the fourth quarter.
The country’s prized triple-AAA credit rating is already under threat and Scott Morrison will do his bext with his midyear fiscal and economic outlook on 19 December to persuade the rating agencies and the markets that he has the situation under control.
Consumer spending growth is 2% annualised over the last six months. This is occurring at a time where the business surveys have already soured somewhat and retail spending momentum has been fading.
The breadth of the contraction in construction activity does indeed seem consistent with weather effects. At the least this makes a quarterly GDP growth outcome of 1% for 4Q17 achievable. And there is precedent for output consistently surging back after weather-related disruptions over several quarters: after a slight 0.2% contraction during the 2011 Queensland floods, which badly disrupted coal export output, GDP growth averaged 1.1% for four straight quarters.
3.10am GMT
Great chart courtesy of our friends at Business Insider showing the quarterly dips of the past 25 years.
CHART: Australia's quarterly GDP decline was the largest since the GFC (via @BIAUS) https://t.co/JZLnxAN9Qx pic.twitter.com/lQU9a2arAk
3.04am GMT
The trade minister, Steve Ciobo, has been speaking about the figures from Jakarta where he is on government business.
He admits the numbers are disappointing but the government is focusing on policies to boost economic growth.
Trade export deals are a key part of that and that’s why as a Coalition we’ve focused on locking into place very high-quality trade deals between Australia, South Korea, China and Japan.
So the number is down and it’s not what we would expect as ideal but our annualised growth rate still sits above the OECD average.
2.57am GMT
Looking on the bright side, there are good reasons to think that the decline in GDP won’t be repeated in the December quarter and that Australia will avoid slipping into recession.
The main reason is that the terms of trade improved by 4.5% in the third quarter thanks to rising commodity prices. That trend has continued in recent weeks and should benefit the bottom line when the next round of GDP figures come out in the new year.
I see this as a one-off because some of the factors which dragged down growth were reversed in the current quarter. Housing and public investment will bounce back, retail spending has recently picked up pace and the boom in resource exports will resume.
2.48am GMT
2.35am GMT
The ASX/S&P 200 has taken the poor GDP reading in its stride with miners and banks driving the benchmark index higher today. It’s currently up 32.9 points at 5,461.60, a rise of 0.61%.
That’s a result of the “bad news is good news” paradox that has gripped the financial markets since the end of the world’s central banks started their various money-printing schemes in 2008 ie, the worse the news is from the real world, the more stocks bounce in the hope that the bad news will force central banks to kickstart the economy.
The poor GDP data has people expecting more accommodating policy. The accommodation can be either through friendlier monetary policy or alternatively it could be increased fiscal policy, by that I mean increased government expenditure ideally in the capex side and infrastructure side.
Related: Draghi has financial markets hoping bad news is really good news
2.19am GMT
The GDP contraction has taken a chunk out of the Aussie dollar. It has fallen 0.46% against the US dollar to US74.26c.
It’s also fallen against other currencies, including a drop of 0.31% against the pound. It’s buying 58.65p at the moment.
Australian dollar weakens against all currencies after GDP "shocker" pic.twitter.com/GC2Mlal7Lf
2.12am GMT
At least exports are contributing to income growth which certainly wasn't the case during our so-called 'export boom'.
2.08am GMT
My colleague Gareth Hutchens has written our main news story on the GDP figures which you can read here.
He’s got lots of reaction, including this from James Pearson, the chief executive of the Australian Chamber of Commerce and Industry, who has called for corporate tax cuts.
Australia must not be like the frog in the pot of water that is slowly brought to boil.
To regain our competitiveness, and therefore create and sustain jobs, we must encourage our businesses, which employ most Australian workers, to invest and grow. That includes by cutting the burden of company tax to stimulate investment.
2.06am GMT
The 0.5% contraction has surprised a lot of people because the consensus forecast among economists was 0.2%, according to those surveyed by Australian Associated press.
TD Securities chief Asia-Pacific macro strategist Annette Beacher told AAP that the Reserve Bank would now be trying to work out whether Australia was halfway to a recession, which is defined by two quarters of economic contraction.
I think they’ll be spending the afternoon figuring out to what extent are these one-offs, and can we get rebound in [the fourth quarter].
Will private consumption rebound, will the dwelling sector rebound, will the public sector rebound? They’ll be spending more time looking at that.”
1.58am GMT
Weak GDP should be a wake up call for policymakers. Australia needs an economic policy U-Turn. More:https://t.co/9b7ZxrIti6 #ausecon #auspol pic.twitter.com/MJjOLwxYIY
⭐️ #Business • Nation halfway to recession, GDP down 0.5%: A perfect storm has pushed Australia's economy halfway… https://t.co/vNlOkRwbps pic.twitter.com/vSKGbsYsgA
"Mining production contributed 0 growth maintained historically high levels" Q4 prices are higher BUT trade suggest it wont + impact #ausbiz
1.53am GMT
Commsec’s chief economist Craig James says the figures will turn out to be a blip, “but a very important blip”. Australians of all stripes have become complacent, he says, and have stopped spending and investing. Infrastructure spending will have to take its place to provide “momentum” for the economy in the coming months.
But overall he blamed the uncertainty generated by Brexit and Trump for the decline in GDP.
In the September quarter the economy was hit by a perfect storm. Not only was there the reaction to the UK ‘Brexit’ vote, there was also the federal election and then there was the uncertainty about the US elections. And clearly, when there is a lot of uncertainty around, consumers and businesses tend to delay decisions to spend, invest and employ. A big fall in public investment also accounted for the bulk of the contraction of activity in the quarter.
While spending measures of the economy were weak in the September quarter, income measures were actually quite strong. And the farm sector was also strong in the quarter and should also be a key contributor to growth in coming quarters. We don’t believe there are grounds for another quarter of contraction.
1.45am GMT
The shadow treasurer is speaking in Canberra now and he’s talking about the “deeply disappointing” figures that Scott Morrison “could hardly bring himself to mention”.
After a fair bit of qualification he calls it the “second worst economic performance for 25 years” and calls on Morrison to take responsibility for the problem.
The fact of the matter is that this is just the fourth negative quarter in 100 quarters in Australia. Just the fourth negative quarter since 1991. And in fact, the only other occasions that this has occurred over the last 25 years, there have been very good and clear reasons for it. For example, in 2011 Australia was dealing with Cyclone Yasi. In 2009, the greatest economic downturn since the great depression internationally. And of course the aftermath of the Sydney Olympics. Now, in other words, this is the second worst economic growth result in the last 25 years.
1.35am GMT
Morrison says the figures aren’t just a wake up call, but rather serve as a “demand” for everyone else to support his policies for jobs and growth. Here’s more from his opening remarks to the press conference which has just ended:
The Turnbull government will never take economic growth for granted, ever. In the 12 months to the end of September our economy grew by 1.8%. That’s down from 3.1% achieved at the end of June.
Our growth is still higher than six out of seven G7 economies, second only to the United Kingdom, higher than the US, Canada, Japan, Germany and higher than the OECD average.
1.22am GMT
The treasurer, Scott Morrison, has fronted the media in Canberra to try to explain the dire figures which show the annual growth rate down to 1.8 per cent.
1.16am GMT
The ABS is fairly clear about the reasons for the shrinking of the economy.
In its press release on the figures, it says the 3.6% decline in output of the construction industry “was the largest contributor to the fall in GDP growth” on an industry basis. It said other industries such as financial and insurance services, professional scientific and technical services, rental hiring and real estate services and administrative support services also contributed to the overall decline.
The volume of activity in the Australian economy decreased 0.5% in the September quarter 2016, the first quarter of negative growth since the Queensland flood affected March quarter 2011. Through the year growth remains positive at 1.8%, reflecting the three previous quarters of growth.
Economic activity contracted in a number of areas this quarter. Private investment in new buildings detracted 0.3 percentage points from GDP growth, while new engineering and new and used dwellings detracted 0.2 and 0.1 percentage points respectively. Public capital expenditure detracted 0.5 percentage points from growth as it declined from elevated levels in the June quarter. Net exports detracted an additional 0.2 percentage points from growth. Australia’s terms of trade rose 4.5% through the September quarter.
1.08am GMT
The ABS bad news for the Aussie dollar which fell sharply on the news and is currently trading at US74.24c. Stock market investors were more sanguine, however, with the ASX/S&P 200 index up 0.5% on the morning.
Aussie dollar falls from US74.65c to US74.25c after GDP result#ausbiz #ausecon
https://t.co/APM6e5VQny Australia Q3 GDP negative and big miss on expected - AUD response
Ooof. Australia 3Q GDP misses expectations, first contraction in 5 years:
-0.5% Q/Q, est -0.1%
+1.8% Y/Y, est 2.2%#ausbiz $AUD pic.twitter.com/gu67vTKjdo
1.04am GMT
Good morning and welcome to the live blog on reaction to the surprisingly poor GDP figures from the Australian Bureau of Statistics today.
They showed that the economy shrank by 0.5% in the three months to the end of September, the first negative quarter for five years and only the fourth for more than two decades.
Related: Australian GDP: economy shrinks by 0.5% in September quarter
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