The Australian economy is humming, recording its 20th consecutive quarter of growth in the first three months of the year, according to data released by the Australian Bureau of Statistics (ABS) on Wednesday.
Real gross domestic product (GDP) grew by 1.1% in Q1 in seasonally adjusted chain volume terms, seeing the year-on-year growth rate accelerate to 3.1%, the fastest pace seen since the September quarter 2012.
Markets had been expecting the year-on-year growth rate to slow to 2.8%, following a downward revision to Australia’s Q4 2015 GDP figure which was trimmed to 2.9% from 3.0% reported previously.
It has now been 99 quarters since the Australian economy has experienced a technical recession — defined as two quarters of negative real GDP — second only to the Netherlands in terms of an uninterrupted period of growth for a developed economy.
Put another way, it’s been nearly a quarter of a century since Australia has been in recession.
According to the ABS, the major drivers of growth during the quarter came from exports and household final consumption expenditure which contributed 1.0 percentage points (ppts) 0.4ppts respectively.
Combined with a marginal fall in imports, it saw net exports contribute a whopping 1.1ppts to growth during the quarter.
The table below, supplied by the ABS, reveals the internal movements in the GDP report, looking at the individual contributions by category. We’ve highlighted the quarterly contributions to growth in red.
Outside of household consumption and trade, government consumption expenditure contributed 0.2ppts to the quarterly growth figure. Private investment in dwellings also increased, adding 0.1ppts.
Partially offsetting those gains, private gross fixed capital formation lopped 0.5ppts off growth, led by a slide in engineering construction and buildings associated with the unwinding mining capital expenditure boom.
Although the economy grew strongly when measured in volume terms, the news was not as robust when measured using other metrics.
The GDP price deflator, which shows the overall price movement in the Australian economy, fell 0.6% over the quarter, fitting weakness seen in consumer price inflation over the same period.
Real net national disposable income, described by the ABS as “a broader measure of change in national economic well-being” increased by just 0.2 per cent during the quarter after seasonal adjustments, seeing the year-on-year decline accelerate to 1.2%.
It is seen as a measure of the real standard of living of Australians, so on that measure the economy is not as strong as the real GDP figure would suggest.
Gareth Aird, senior economist at the CBA, also notes that nominal GDP, the broadest measure of income in the economy, grew at a slower pace than real GDP (which does not incorporate price movements) both over the quarter and year-on-year, helping to explain why the economy “feels weaker than the output numbers imply.”
It grew 0.5% for the quarter, and 2.1% from the March quarter a year earlier.
“Historically it’s a rare thing, but it has been a familiar outcome since September 2014,” says Aird.
“Income weakness weighs on both household and business confidence and also on inflation expectations”, he says, adding “it also makes debt repayment harder, notwithstanding record low interest rates.”
Despite this, and the backwards-looking nature of the report, the Australian dollar has rocketed higher in response to the headline GDP beat, currently trading just under .7300 against the US dollar.
Australian stocks have trimmed their earlier session declines with the ASX 200 now down 0.92% at 5329.3.
Expectations for a further interest rate cut have also diminished, with August cash rate futures currently sitting at 98.37, implying a 51% chance that the RBA will cut the official cash rate to 1.50% in August.
It had been seen as a 62% probability prior to the GDP release.
Although markets now see a diminished chance of a rate cut from the RBA ahead, Aird retains the view that further monetary policy easing is still likely.
“Growth at a little above trend would normally be accompanied with a discussion around monetary policy tightening rather than loosening. But the composition of growth, coupled with incredibly weak wages pressures and falling inflation expectations mean that the RBA’s concerns about entrenched low inflation and disinflation risks will persist,” he says.
“As such, we expect further monetary policy easing and have pencilled in two more rate cuts that would take the cash rate to just 1.25%.”
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