Recently released main economic indicators data by the Australian Bureau of Statistics (ABS) confirm that the printing industry and the Australian economy are progressing along differing paths of economic growth with the former continuing to register robust economic growth and expansion in trend terms while the latter experienced its weakest economic growth since December quarter 2008.

While I tend to focus on trend data as it tends to be more reliable removing on off factors and influences, the other measure that of seasonally adjusted which accounts for seasonal influences and which the media tends to focus on revealed that the Australian economy contracted by 0.5 per cent during the September 2016 quarter the first such contraction since March quarter 2011. The reported deterioration in seasonally adjusted terms proved significantly sharper than what was being anticipated.

What does the latest economic growth data mean? Is the Australian economy in danger of entering a recession after an impressive 25 consecutive years of economic growth? This column will attempt to provide answers to these questions by reviewing the latest economic data and also taking into account the Mid-Year Economic and Fiscal Outlook (MYEFO) which was released by the Federal Government in December 2016. MYEFO provides us updated federal budget and economic forecasts.    

Print maintains economic momentum

Print continues to make its economic comeback following the release of the September 2016 quarter main economic indicators data. The economic trend that was emerging in previous quarters was maintained with both sales and industry gross value added data showing noticeable improvements. New capital expenditure also continued the recent trend with another quarter of reported deterioration.  

Capex improves year on year

The September quarter outcome was the third consecutive quarter decline in new capital expenditure in the printing industry. The 28.3 per cent deterioration resulted in the September 2016 quarter outcome being some 53.7 per cent lower than the corresponding period a year earlier. During the year to September the printing industry spent a reported $260m in new capital expenditure compared to $201m for the same period a year earlier. So despite the recent deterioration when measured on a year on year basis, new capital expenditure in the printing industry still shows an improvement of 29.4 per cent largely due to impressive investment expenditure during the December 2015 and March 2016 quarters.

Sales improve on quarters

Printing industry sales data show industry sales grew in trend terms by 2.3 per cent during the September 2016 quarter to register the third consecutive quarter of growth. During the year to September total printing industry sales reached $7,647m representing a deterioration of 1.7 per cent compared to the same period 12 months earlier.

While having three consecutive quarters of reported improvements is a welcome development for an industry that remains in in economic transition, the recent industry sales improvements need to also be placed in a historical context. Industry sales for instance are down by 28.6 per cent when compared to the golden era of print the 12 months to September 2007 when industry sales exceeded more than $10.7 billion. The following chart depicts the industry sales performance within this historical context by comparing different periods of economic significance.

Industry economic growth positive

Economic growth in the printing industry has now expanded for four consecutive quarters following the release of the September 2016 quarter data. In trend terms the industry expanded by 2.5 per cent during the quarter and by an impressive 3.4 per cent in seasonally adjusted terms. Over the year to September 2016 the printing industry gross value added stood at over than $3.3bn representing a modest improvement of 0.9 per cent on a year on year basis. Interestingly the year to September high for the industry historically has stood at more than $5.8bn an outcome that was achieved in the 12 months to September of 2004. Again while the recent trend shows an industry that is recovering like the sales data the reported contemporary data remains well below the historical high this time by 42.7 per cent.  

The chart below shows the performance of the printing industry (blue line) relative to the Australian economy (red line) over the past two decades.

Economy slows down

Signs of the significant slowdown that was reported in the Australian economy for the September quarter came six days prior to the release of the economic growth data when the ABS released the new capital expenditure for the quarter. The data confirmed that total private new capital expenditure had fallen in trend terms by 4.9 per cent during the September quarter and by a massive 15.6 per cent for the year to September. While plant and machinery increased modestly during the quarter investment in buildings and structures collapsed to drag down the aggregate numbers. Seasonally adjusted data also showed a fall in plant and machinery investment during the quarter and a moderate increase during the year.    

The Australian economy grew by very modest 0.2 per cent during the quarter to drag down the annual growth rate to 2.2 per cent in trend terms. The seasonally adjusted quarterly fall of 0.5 per cent made headlines resulting in a weak annual growth rate of 1.8 per cent. In trend terms government and household expenditure, investment in dwellings and public investment all made positive contributions to economic growth during the quarter while investment in non-dwelling construction significantly detracted from economic growth. In fact the decline in investment in non-dwelling construction was so significant that it helped offset the positive contributions made to economic growth by household and general government expenditure. Net exports made no contribution to growth.

When the data is presented in seasonally adjusted terms, only household expenditure and inventories made positive contributions to economic growth while investment in dwellings and non-dwelling construction, public investment and net exports all detracted from economic growth during the quarter resulting in the noticeable decline in economic growth in seasonally adjusted terms. Some positive trends emerging from the economic growth data are improvements to real net national disposable income, real net national disposable income per capita and terms of trade which have registered improvements in recent quarters.

Sectors making positive economic contributions in trend terms were financial and insurance services, professional, scientific and technical services and health care and social assistance, while construction detracted from growth. In seasonally adjusted terms agriculture, forestry and fishing, and financial and insurance services made positive contributions to economic growth whilst mining, construction, rental, hiring and real estate services and other services made negative contributions.

At the state and territory level the data confirmed that New South Wales, Queensland, South Australia, and Northern Territory all registered economic growth while Victoria, Western Australia, Tasmania and the Australian Capital Territory recorded economic contractions. 

Credit rating

MYEFO showed deteriorating budget deficits due to the impact of weak wage inflation on income tax receipts and weaker growth in corporate profits. The underlying cash balance is now expected to deteriorate by $10.5bn over the period to 2019-20 while the fiscal balance is projected to deteriorate by almost $18bn over the same period. Despite these forecast deteriorations, MYEFO is projecting that the underlying cash balance will return to surplus in 2020-21.

Following the release of MYEFO the consensus amongst economic commentators was for increased probability of Australia being subjected to a credit downgrade. However while the international rating agencies were not impressed by the projected deterioration in the budget balance and the weakening of the general economic outlook, the underlying message emanating from them was that they expect either expenditure cuts or revenue measures or a combination of both to help improve the budgetary situation going forward. In effect the 2017-18 budget to be delivered in May 2017 now becomes crucial for Australia’s credit rating.

Any credit downgrade would not only increase costs of borrowing funds for state and federal governments, but also for households and businesses. Such a development could undermine both business and consumer sentiment which could further impact on the pace of economic growth.  For printing participants the economic forecasts outlined in MYEFO showing deterioration in real economic growth will be crucial as any short term weakening of economic growth dynamics could determinately impact the current phase of economic expansion being experienced by the printing industry.

Domestic economy forecasts

Conclusion

There is no doubt the significant slowdown in economic activity reported during the September 2016 quarter is causing concern about Australia’s future economic prospects. The economic slowdown in trend terms was caused by a sharp decline in non-dwelling investments while the decline in seasonally adjusted terms was caused by deteriorations in investment in dwellings, public investment and net exports. The printing industry recovering from a lower base recorded robust economic growth and sales outcomes but investment in new capital expenditure continued its recent deteriorating trend. The Australian economy in seasonally adjusted terms is now one quarter away from fulfilling the technical definition of a recession which comprises of two consecutive quarters of declining economic activity. It is important to remember that whilst economic growth slowed down noticeably in trend terms, a modest quarterly expansion was still observed. This will be the critical monitor moving forward which makes the release of the December 2016 quarter main economic indicators data even more significant now in determining whether Australia’s economic miracle is coming to an end after 25 years of uninterrupted growth or was the September quarter growth data an aberration. The Australian economy will one day slide into a recession as economic cycles are still pertinent. The question will not be if but when that will occur as well as the severity and duration of such an economic downturn.

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