The Australian economy has gone from sluggish to supercharged in one year -- but not everyone's convinced it will last

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  • The Australian economy has gone from sluggish to supercharged in the space of a year.
  • Capital Economics says much of the acceleration reflects a boost from business, something it does not expect will last.
  • It forecasts that year-ended growth in 2018/19 will slow to around 2.5%, down from 3.4% at present.

In the year to June last year, the Australian economy grew by a paltry 1.9%. However, in the space of 12 months, that pace has nearly doubled with GDP expanding by 3.4%, the fastest in nearly six years.

The economy has gone from sluggish to supercharged in a short period of time. However, like Westpac’s Australian economics team, Capital Economics doesn’t expect that trend will last.

“GDP growth may slow from 3.4% now to average just 2.5% in 2019,” says Marcel Thieliant, Senior Australia and New Zealand Economist at the group.

“So while the recent performance of the economy has been nothing short of impressive, it’s not something everyone should get used to.”

This chart from Capital Economics helps explain why it doesn’t expect the recent growth spurt to be sustained.

Capital Economics

It shows the percentage point (ppts) contribution to year-ended real GDP growth by individual component, comparing the results seen in the year to June 2017 to those seen in the latest national accounts.

According to Thieliant, the vast majority of the improvement between the two years reflects the behaviour of businesses.

“Of that 1.5 percentage point (ppt) acceleration [from year-ended growth in June 2017], business investment accounted for 1.3ppts, inventories for 1.0ppts and dwellings investment for 0.3ppts,” he says.

“So whether or not this surge in GDP growth is sustained largely depends on the outlook for investment.”

Thieliant is doubtful the business-led boost will be sustained, even with the likelihood that public sector investment will remain firm on the back of a projected jump in spending by Australia’s Federal and State governments.

“Inventories can add to GDP growth only temporarily and the growth rate of private investment has probably peaked,” he says, adding that there needs to be a distinction between private and public investment given the former makes up 20% of GDP compared with the latter’s 5%.

“The recent fall in firms investment intentions in the NAB survey points to an easing in the growth of non-mining business… and the fall in building approvals in recent months means it is only a matter of time before dwellings investment starts to decline again.”

So after adding 0.8ppts to growth over the past year, Thieliant expects total investment will add nothing to GDP in the current financial year.

Along with an expectation that consumption growth — the largest part of the economy — will also moderate, it underpins the view that the spectacular acceleration seen over the past year is unlikely to be repeated in the year ahead, at least in his opinion.

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