AUSTRALIA'S ECONOMY BOUNCES BACK

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Australian economic growth rebounded strongly in the June quarter after a slow start to the year, propelled higher by household consumption, government spending and lift in net exports.

According to the Australian Bureau of Statistics (ABS), GDP grew by 0.8% in seasonally adjusted chain volume terms, accelerating sharply following a 0.3% increase in the March quarter.

The increase saw the annual pace of growth remain steady at 1.8%.

Despite the acceleration in both quarterly and annual growth, the result narrowly missed expectations for growth of 0.9% and 1.9% respectively.

While a small undershoot, today’s result stretched Australia’s run without experiencing a technical recession to 26 years.

“Domestic spending increased 1.0% for the quarter, driven by a 0.7% growth in household consumption, with expenditure on food, clothing and household furnishings increasing. Dwelling construction grew a moderate 0.2% with growth being observed in New South Wales and Queensland,” said the ABS.

Here’s the contribution to quarterly GDP growth from an expenditure chain volume perspective. We’ve highlighted the column with individual contributions to the quarterly figure.

Source: ABS

The lift in household consumption, the largest component within GDP, contributed 0.4 percentage points (ppts) to growth.

Helping to explain the solid household consumption figure, the ABS said that the nation’s household savings ratio dipped to 4.6%, below the 5.3% level of the March quarter.

Households saved less and spent more, continuing the pattern seen in recent quarters.

The ratio currently sits at the lowest level since the September quarter of 2008, driven lower by continued weakness in wage growth.

“Compensation of employees, which is basically the total income paid to workers, grew by 0.7% over the quarter and is up just 2.1% through the year,” said Gareth Aird, senior economist at the Commonwealth Bank.

“Wages growth is weak which means the modest lift in the total employee salaries bill over Q2 was driven by a rise in headcount and hours worked.”

Government consumption and investment also made a significant contribution to growth, adding 0.2ppts and 0.6pts respectively.

“Public investment increased 11.9% during the quarter driven by state and local general government (25.5%),” the ABS said. “This included the acquisition of the recently completed Royal Adelaide Hospital from the private sector.”

Business spending on machinery and equipment also added 0.1ppts.

Offsetting those positive contributions, business inventories, along with non-dwelling construction, subtracted 0.6ppts and 0.4ppts from growth, an outcome that goes someway to explaining the small headline miss.

On inventories, the largest single drag on quarterly growth, the ABS said the decrease was driven by a decline in wholesale trade inventories — the largest since June 2010 — as grain wholesalers run down stock following the strong grain harvest this year.

In per capita terms, GDP growth grew by a smaller 0.4% for the quarter, reflecting the impact of population growth.

Nominal GDP — taking into account changes in volumes and prices during the quarter — fell by 0.1% on the back of falling commodity prices. However, that followed two quarterly increases of 3.3% and 2.3%, and still left nominal GDP up 6.3% from a year earlier.

“Falling prices for key export commodities impacted the terms of trade in the June quarter, declining 6.0%,” the ABS said. “This has impacted GDP in current prices, which fell 0.1% as lower coal and iron ore prices contributed to more subdued company profits.”

Despite the rebound in real GDP during the quarter, Paul Dales, chief Australia and New Zealand economist at Capital Economics, said it overstates the true health of the Australian economy at present.

“It needs to be taken in context of the weak 0.3% quarterly rise in the first quarter,” he said following the release of the report.

“The 0.6% quarterly average of the two provides a better guide to the true trend and suggests the economy is growing at a subdued rate of about 2.2% per year.

“We suspect growth will improve to only 2.5% next year, which suggests the RBA’s 3.0% forecast is too optimistic.”

Given that assessment, Dales says the RBA will need to keep interest rates unchanged not only next year, but well into 2019.

“The decent increase in the second quarter does mean that growth this year as a whole could be a touch stronger than our 2.0% forecast. But we still believe that growth of just 2.5% next year will force the RBA to keep rates at 1.5% until late in 2019,” he says.

And while Aird at the CBA described the GDP result as solid, he agrees with Dales that it’s unlikely that the RBA will be lifting interest rates anytime soon.

“There is more to the economy than just output,” he says.

“Weak household income growth — flat in Q2 and up just 0.2% over the year — continues to weigh on the consumer.

“Rates will stay on hold until wages growth and core inflation are on a sustained upward trend. And while the recent data flow has been encouraging, we think that we are still some way off seeing a lift in economic activity flow through to firmer prices and wages.

“The next move in rates is up, but we don’t think it arrives until late 2018.”

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