December 6, 2016 06:30 CST

Consensus Actual Previous Revised
Quarter over Quarter -0.1% -0.5% 0.5% 0.6%
Year over Year 2.2% 1.8% 3.3%

Australia's gross domestic product fell by 0.5 percent quarter-on-quarter in the three months to September, down from an increase of 0.6 percent in the three months to June (revised from a previous estimate of 0.5 percent). This is the weakest quarterly growth since the last three months of 2008 and the first quarter-on-quarter fall in GDP since the first three months of 2011. The consensus forecast earlier in the week had been for a quarter-on-quarter increase of 0.2 percent, but this had since been revised lower to a fall of 0.1 percent after the release of other data in the last few days.

Year-on-year growth slowed to 1.8 percent in the three months to September, down from 3.3 percent in the previous quarter. This is the weakest year-on-year growth since 2013, and is also the first fall in year-on-year growth since the three months to June 2015. The consensus forecast had also been revised lower in recent days from 2.5 percent to 2.2 percent.

Weaker GDP growth in the three months to September was driven by private investment, government spending and net exports. In seasonally adjusted volume terms, dwelling investment fell 1.4 percent on the quarter, while new building investment fell 11.5 percent. This weakness in investment was again driven by the mining sector. Mining investment fell for the twelfth consecutive quarter, dropping 10.6 percent, offset by an increase of 4.8 percent in non-mining investment.

Government spending data released earlier in the week showed that government consumption fell 0.2 percent quarter-on-quarter in the three months to September, after an increase of 1.9 recent in the three months to June. There was also a sharp turnaround in government investment spending, which fell 10.4 percent quarter-on-quarter after increasing by 19.8 percent the previous quarter.

Net exports made a negative contribution to headline growth of 0.2 percentage points in the three months to December, with 0.3 percent increase in export volumes outweighed by a 1.3 percent increase in import volumes.

Household consumption was the only major expenditure component to make a positive contribution to GDP growth. This component increased 0.4 percent on the quarter and by 2.5 percent year-on-year.

On an industry basis, the construction sector made the biggest contribution to the fall in GDP growth, down 3.6 percent on the quarter. Other weak sectors included financial and insurance services, professional scientific and technical services, rental hiring and real estate services and administrative support services. Mining output was flat on the quarter, while agricultural production rose 7.5 percent.

The GDP price deflator, which shows the overall price movement in the Australian economy, rose by 1.2 percent in the three months to September. and by 1.4 percent year-on-year. Australia's terms of trade, a measure of the relative strength of export and import prices, rose 4.5 percent in the three months to September.

Although the fall was sharper than expected, the slowdown in GDP growth confirmed in today's report had already been anticipated, including by the Reserve Bank of Australia. In the statement accompanying its decision to leave policy rates unchanged yesterday, the RBA noted that growth was likely to slow down in the near-term.

This decision suggests that officials, for now, are not overly concerned about the drop in growth, with the statement also noting the recent pick-up in commodity prices, the improvement in Australia's terms of trade, and the prospect of stronger exports. This is consistent with the RBA's view that the Australian economy is continuing a transition from the mining investment boom a few years ago, with officials expressing confidence that growth is likely to peak up again soon. In particular, officials expect that the drag on growth caused by weak mining investment will increasingly be offset by positive contributions to growth from mining production and exports, taking advantage of the extra capacity created by past investment in the sector. This week's RBA statement also noted that inflation is expected to return to "more normal" levels.

These factors suggest that today's GDP report will have only a limited impact on upcoming policy decisions, despite the attention that will likely be given to the weak headline number. The RBA's next policy meeting is scheduled for early February, by which time officials will have seen inflation data for the three months to December. By then officials will also have seen several other monthly indicators that should provide information on whether the weakness in activity seen in the three months to September has extended into the last quarter of the year. Some more up-to-date data have already shown some positive signs since the start of the current quarter, with full-time employment up strongly and retail sales recording solid growth in October. Officials at the February meeting will also have had time to assess the impact of an expected increase in U.S. policy rates later this month.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy and is usually released early in the third month after the reference period.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. These data, which follow the international classification system (SNA93), are readily comparable to other industrialized countries. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.