- Australia’s economy grew at an annual pace of over 4% in the first half of 2018.
- Trade, especially stronger exports, contributed to the acceleration in growth.
- JP Morgan says the tailwinds from trade are likely to diminish by the end of the year, placing the onus on other parts of the economy to underpin economic growth.
Australia’s economy grew by 3.4% over the past year, and at an annual pace of over 4% between January to June.
Strong numbers in anyone’s language.
One of the factors behind the recent acceleration in growth has been the contribution of trade, particularly exports.
Net exports — measuring changes in the volume of exports less imports — added over 0.3 percentage points (ppts) to GDP growth in the March quarter, and another 0.1ppts in the three months to June.
While certainly not the only the reason behind the recent acceleration in the Australian economy, it certainly helped.
However, it’s not expected to last, says Tom Kennedy, Economist at JP Morgan.
“We expect export growth to slow further through the second half of the year given the bulk of Australia’s major LNG, iron ore and coal mines are now approaching output capacity and scope for further marginal increases appears limited,” he says.
“As a result, the net export contribution to real GDP growth is expected to fade and become neutral by the end 2018.”
So after providing a tailwind in recent quarters, the contribution to growth from trade look set to slow, then stop, by the end of year as Australia’s existing mining capacity hits its limits.
Kennedy says that means it will be left up to the remaining areas of the Australian economy to underpin growth as we move into next year.
In particular, he says households, as the largest part of the economy, will have do much of the heavy lifting, continuing the form seen in the latest set of national accounts for the June quarter.
“The burden of growth will fall increasingly on household consumption and business investment in order to keep the trajectory of domestic demand broadly stable,” Kennedy says.
The question many are now asking is whether households will be able to support growth to anywhere near the degree seen in the June quarter, especially at a time when home prices are falling in many parts of the country and household income growth is low.
Throw in a decline in Australia’s household savings ratio to just 1% — the lowest level since before the GFC — and there’s not much of a buffer available for households to sustain their spending levels.
If home prices continue to fall, something many believe will happen for some time year, it could prompt households to reverse the recent trend of saving less and spending more, putting the onus onto stronger income growth to sustain spending levels.
Kennedy is doubtful that will eventuate.
“With Australia’s savings ratio already at historically low levels and wages likely to increase only very gradually, it appears the most likely outcome is for households to tighten the purse strings and for spending to slow,” he says, adding that “tighter credit conditions exacerbate this dynamic”.
As such, he expects the rollicking growth in the first half of the year is unlikely to be repeated in the coming quarters.
“[We expect] growth to moderate through the second half of 2018 on the back of fading net exports and softer household spending,” he says.
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