- International trade will add 0.3 percentage points to Australian economic growth in the March quarter, below the 0.5ppts increase expected.
- Australia’s current account deficit narrowed to $10.469 billion, less than the $9.9 billion level forecast by economists.
- Government consumption is expected to add 0.3ppts to real GDP, offsetting a 0.1ppt contraction from investment.
Australia received the last of its partial GDP inputs today with the release of Balance of Payments (BoP) and government finance figures for the March quarter.
They were mixed with a softer-than-expected contribution from international trade offset by continued strength in government spending.
As such, Australian economic growth looks set to accelerate sharply in the March quarter.
According to the Australian Bureau of Statistics (ABS), net exports will add 0.35 percentage points (ppts) to real GDP, below the 0.5ppts increase expected by economists.
Net exports had detracted 0.65ppts from GDP growth in the December quarter, reflecting temporary supply disruptions for some of Australia’s key commodity exports.
“In volume terms, exports rose stronger than imports this quarter, and as a result international trade is expected to contribute 0.3 percentage points to growth in the March quarter 2018 Gross Domestic Product,” the ABS said.
Including price movements over the quarter, the ABS said exports of goods and services rose by $7.063 billion, or 7%, after seasonal adjustments, larger than the 0.2% increase in imports which rose by $1.958 billion.
As such, Australia recorded a trade surplus of $4.083 billion during the March quarter, a sharp turnaround from the $1.022 billion deficit in the final three months of 2017.
After seasonal adjustments, Australian terms of trade increased by 3.3% to 119.3.
Terms of trade is the price of Australia’s exports divided by the prices of imports over a specific period, then multiplied by 100.
The shift from deficit to surplus in the trade balance saw Australia’s current account deficit narrow to $10.469 billion in seasonally adjusted terms, below the upwardly-revised $14.661 billion figure of the December quarter.
Despite the improvement, it was smaller than the $9.9 billion level expected by economists.
Contributing to the larger-than-expected current account deficit, the ABS said Australia’s net primary income deficit widened by $1.025 billion to $14.253 billion during the quarter.
The primary income account shows income flows between residents and non-residents over the quarter.
However, helping to offset the miss on net exports, government consumption rose strongly over the quarter, and will help to boost Q1 GDP.
Government consumption expenditure increased by $1.293 billion, or 1.6%, something the ABS says is likely to add 0.3 percentage points to real quarterly GDP.
While consumption increased, investment fell by $444 million, or 2%, an outcome that is expected to detract 0.1ppts from growth.
Still, despite the mixed performance, government demand will still make a sizable contribution to quarterly GDP.
“Public demand is expanding at a well above trend pace, a dynamic that has extended into early 2018, with investment in an upswing and spending on health on the rise,” said Andrew Hanlan, Senior Economist at Westpac.
“In short, the public sector is a key growth engine at present, with positive spill-over effects to the private sector.”
“Consumption was the surprise, up a brisk 1.6% for the quarter, potentially reflecting a further lift in health spending, in part associated with the roll-out of the NDIS. Investment posted a solid 1.3% increase
With all the partial inputs now received, all eyes will now turn to Australia’s official GDP report that will be released on Wednesday.
Hanlan thinks it will be more than good.
“Our forecast for Q1 GDP growth has been upgraded to 1.1% for the quarter, leaving the year-on-year increase at 3.0%,” he said.
“Such an outcome would bring output more in to line with employment strength over the past year – with jobs growth a blistering 3.5% over the past year.”
The Commonwealth Bank is also looking for a big number, forecasting a quarterly increase of 1%.
Others, such as JP Morgank expect the quarterly acceleration to be smaller, forecasting an increase in real GDP of 0.8%.
Helping to explain the uncertainty over the final number, household consumption — the largest part of the economy at around 60% — won’t be known until the actual GDP report is released.
Real retail sales increased by 0.2% over the quarter, a weak result after a strong end to 2017.
Whether that is replicated in consumption of services — far larger than retail sales — will determine whether quarterly growth was good or great.
“The consumer remains a key uncertainty,” says Hanlan at Wetspac.
“We expect consumer spending to increase by around 0.6%, representing a moderation from the 1.0% burst in Q4.”