After three consecutive quarters of 3% plus GDP figures, Australia’s economy has gone into reverse. The economy shrank by -0.5% over the September quarter, a figure which was much lower than the median forecast of 0.2%. On a year-on-year basis, GDP growth was 1.8% which was also much lower than the 2.5% median forecast.
In previous quarters the public sector at the state and local government levels had added significantly to GDP growth. In this quarter, public sector investment decreased by 10.4%, which had the effect of lowering GDP growth by 0.5%.
Given the shock number, it was surprising financial markets did not react more. Currency markets sent the AUD 0.3 US cents lower and bond yields dropped on the news but by the end of the day 3 year bond yields were 5bps lower at 1.91% and 10 year yields were 3bps lower at 2.765%. However, after a closer inspection of the numbers, economists came to the same conclusion as the RBA and viewed the contraction as temporary.
Australia is still within reach of the record for longest number of quarters without a recession. In economics, a recession is commonly defined as two quarters in a row of negative GDP growth. At 103 quarters, the Netherlands has the longest non-recessionary period since records were kept. If Australia goes back into positive territory in the December quarter, only one more quarter of positive growth will be needed to equal this record.
