Australian GDP growth surges -- but households are looking fragile

Michael Steele/Getty ImagesGrowth is expected to jump.
  • Australian economic growth rose strongly in the first three months of the year, boosted by household consumption, government demand, stronger exports and a lift in business inventories.
  • The economy expanded by 1% in real terms, leaving the increase on a year earlier at 3.1%, the fastest since the middle of last year.
  • Stronger growth in exports contributed half of the quarterly increase. Along with firm government demand, this masked a sharp slowdown in household consumption.

Australian economic growth rose strongly in the first three months of the year, boosted by household consumption, government demand, stronger exports and a lift in business inventories.

According to the Australian Bureau of Statistics (ABS), GDP increased by 1% in seasonally adjusted chain volume terms, topping forecasts for an increase of 0.9%.

It was the largest quarterly increase since the final quarter of 2011.

The increase in December quarter GDP, previously reported at 0.4%, was revised up to show a larger expansion of 0.5%.

That better-than-expected quarterly increase saw year-on-year growth lift to 3.1%, well above the 2.8% level expected.

As seen in the chart below, that was the fastest increase since the June quarter of 2016, and above the 2.75% level that had been expected by the Reserve Bank of Australia.

“Growth in exports accounted for half the growth in GDP [in the quarter], and reflected strength in exports of mining commodities,” said Bruce Hockman, Chief Economist at the ABS.

Exports rose by 2.4% during the quarter, contributing a hefty 0.5 percentage points (ppts) to growth. Imports rose by a smaller 0.5%, subtracting 0.1ppts from quarterly growth.

Combined, international trade added 0.4ppts to quarterly GDP, partially reversing a sizable contraction in the final three months of 2017 that was due to temporary disruptions to commodity exports.

This table from the ABS shows the contribution to quarterly GDP growth from an expenditure perspective. It shows the stellar headline print masked what was a weak performance from household consumption, the largest part of the Australian economy.

ABS

The ABS said household consumption grew by just 0.3% during the quarter, adding just 0.2ppts to growth.

It said the increase largely reflected greater spending on non-discretionary items.

“This was driven by rises in non-discretionary components such as insurance and other financial services (0.7%), food (0.5%), and electricity, gas and other fuels (2.3%),” it said.

“There were falls in hotels, cafes and restaurants (-1.8%) and alcoholic beverages (-2.0%).”

Gareth Aird, Senior Economist at the Commonwealth Bank, said the weak performance had to be put in context following a strong increase in household spending in late 2017.

“Smoothing out the past two quarters provides a better gauge of the household expenditure pulse,” he said.

“On that basis, spending growth has been respectable over the past six months and annualises out at 2.8%.”

Helping to fuel spending on predominantly non-discretionary items and services, the ABS said Australia’s household savings ratio — measuring the proportion of income saved — fell to just 2.1%, the lowest level since December 2007.

Spending was also helped by a modest increase in compensation of employees which increased by 1.2% over the quarter.

“The increase was driven by health care and social assistance, administrative and support services, public administration and safety, and education and training,” the ABS said. “These rises were partially offset by a fall in accommodation and food services and professional scientific and technical services.

Compensation of employees in the private sector grew by 1.2%, outpaced by a 1.4% increase in the public sector.

Per employee, average compensation rose by 0.5% over the quarter, reflecting that most of the headline increase came from greater levels of employment rather than an acceleration in wages.

“The news in today’s data was better for employers rather than employees,” said Aird.

“Company profits rose by a sizable 5.2%.

“Over the year, the total employee wages and salaries bill has rose by 5.1% — its strongest rate of growth since Q2 2012.

“The big lift in employment has driven the increase despite the weakness in wages growth.”

Outside of households, government consumption rose by 1.6% over the quarter, adding 0.3ppts to GDP. Headline government spending on investment fell, although the ABS said that reflected asset transfer from the public to private sector during the quarter.

Dwelling and non-dwelling construction added 0.1% apiece to quarterly GDP, while the remainder was driven by a 0.2ppts increase from business inventories.

In per capita terms, GDP increased by 0.7% over the quarter in seasonally adjusted chain volume terms, an improvement from the 0.2% lift seen in the December quarter last year.

Income gains

From a year earlier, per capita GDP increased by 1.5%, again, faster than the 0.7% gain seen in the prior quarter.

While the smaller increase than headline GDP reflects the impact of population growth, the positive readings indicate that productivity improved over both the quarter and year, albeit the annual increase still remains well below the levels seen prior to the GFC.

GDP per hour worked also improved, increasing by 1.4% over the quarter following a 0.6% drop in late 2017. The ABS said total hours worked fell by 0.4% after jumping 1.2% in the prior quarter.

Including price movements, nominal GDP increased by 2.2% over the quarter, leaving it up 3.9% over the year.

That was faster than the 3.5% increase seen in the year to December last year.

Nominal GDP is the broadest measure of income in the economy, and therefore has implications for government tax revenues.

Despite the iffy performance from the household sector in the three months to March, there was some good news for Australians.

Real net national disposable income per capita — deemed to be the best indicator of national living standards — jumped by 1.5% over the quarter, a sharp improvement on the near-flat level seen in the prior three months.

From a year earlier, it increased by 0.9%. Small, but something.

Financial markets have responded positively to the GDP report.

The Aussie dollar is rallying while government three and 10-year government bond futures are selling off, indicating higher yields.

However, while a strong headline increase in GDP, Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, thinks this could well be the high water mark for growth this year.

The 1.0% rise in GDP in Q1 suggests that the economy started the year on a strong note,” he said.

“We suspect that may be as good as it gets.

“We doubt that the strength of net exports will be sustained as there was an element of catch-up after production problems in Q2 and Q3. But we fear that still subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.”

Aird shares a similar view.

“Looking further ahead, we expect GDP growth to sit around 2.75-3% per annum for the next few quarters. The global backdrop remains favourable notwithstanding geopolitical risks,” he says.

Both agree that the GDP report is unlikely to have any near-term implications for official interest rates, either.

“With a strong rise in inflation still unlikely and the Royal Commission casting a cloud over future lending conditions, the RBA probably won’t raise interest rates this year or for most of next year,” says Dales.

Aird says trends in the labour and housing markets are the ones to focus on at present.

“At this juncture they are consistent with the cash rate staying on hold for the remainder of the year,” he says.

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