The early signs are looking good for Australian GDP

Cameron J Spencer/Getty Images
  • The RBA expects Australian economic growth will accelerate this year, perhaps over 3%.
  • Australian trade data today looks set to add significantly to Q1 GDP when it it released in a month.
  • Building approvals are also holding at elevated levels, adding top near-term optimism about economic activity.

Tomorrow the Reserve Bank of Australia (RBA) will release updated economic forecasts for the next two years, including for GDP growth.

After a disappointing 2.3% increase in 2017, it’s almost certain to retain the view that economic growth will accelerate sharply in 2018.

In its monetary policy statement earlier this week, RBA Governor Philip Lowe remarked that “the bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3% in 2018 and 2019.”

If correct, it will mean Australia’s economy will grow above its potential growth rate — widely perceived to be around 2.75% — over the next couple of years, an outcome that should help to reduce unemployment and boost wage growth and, as a side effect, add to inflationary pressures.

Some think the RBA’s forecasts are too optimistic, pointing to the likelihood that lower residential construction and ongoing softness in household spending will, in the end, lead to further disappointment.

That may well be so, but if the early indicators on building approvals and trade are anything to go by, it looks like Australia’s economy started 2018 on solid footing.

Both surprised to the upside in March, especially Australia’s trade balance, something Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, says will likely add significantly to real GDP growth in the March quarter.

“After taking into account price effects, it look as though real goods and services imports may have fallen by 0.5% in the first quarter as a whole, while real exports may have risen by 3.0%,” he says, pointing to the chart below.

Source: Capital Economics

“After subtracting 0.5 percentage points (ppts) from real GDP in the fourth quarter, net exports may have added about 0.5ppts in the first quarter.”

Half a percent, not a bad start by any means, especially considering real GDP grew by just 0.4ppts in the final quarter of 2017.

Dales says there’s now a reasonable chance that the economy may have grown by around 1% in the first three months of the year.

“It is now possible that the 0.4% rise in GDP in the fourth quarter of last year was followed by something like a 1.0% gain in the first quarter,” he says.

“We doubt that would be repeated throughout the year. But it is encouraging that Australia appears to have strengthened when others have weakened.”

And he’s not alone in offering a bullish forecast for what Australia’s GDP report could bring.

“Our Q1 GDP tracking is around 0.8%, to be updated with next week’s Q1 real retail sales report,” said Annette Beacher, Chief Asia-Pacific Macro Strategist at TD Securities.

Tom Kennedy, Economist at JP Morgan, was another who suggests risks to their initial forecasts may now be to the upside.

“Deflating today’s export and import data by the recently released terms of trade print suggests export volumes rose 3% last quarter, marginally stronger than our prior expectation,” he said following the release of the trade report.

“At the same time, import volumes were weaker than we had assumed, coming in flat on the quarter.

“On balance these dynamics imply some upside risk to our forecast for net trade to add 0.25ppts to real GDP growth in 1Q.”

Economists from the NAB, AMP Capital and ANZ, among others, also suggested that a better-than-expected trade performance will likely add to Q1 GDP.

And while the near-term trade picture is looking good, Andrew Hanlan, Senior Economist, thinks those trends may continue over the next couple of years.

“The outlook for exports is positive in our view, led by LNG as new capacity comes on stream and services such as education and tourism in response to strong demand from the Asian region and complemented by the recent retreat in the Australian dollar,” he says.

Adding to optimism about the economy in the near-term, building approvals are also holding up far better than many were expecting, lifting by 2.6% to 19,603 in March in seasonally adjusted terms, an increase of 14.5% on 12 months earlier.

As a lead indicator on building activity, this suggests that residential construction many not detract as much from GDP growth, or not at all, in the year ahead.

“The backlog of housing construction remaining rose to a new record level in the December quarter, at $39.4 billion,” said Daniel Gradwell, Senior Economist at ANZ Bank.

“This is consistent with our view that dwelling investment will remain at elevated levels through 2018.”

While the early signs for Q1 GDP are looking good, it’s worth remembering that there’s still a lot of inputs to come, starting with retail sales volumes next Tuesday, a major component in household consumption which is the largest part of the Australian economy.

Business inventories and investment, residential construction and government consumption and investment figures are also still to be released.

That alone underscores the need for caution, but the early indicators are positive about a growth acceleration in the year ahead.

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