- Australian GDP grew by 0.9% in the June quarter, and by 3.4% over the year. Annualised, growth in the first half of the year was over 4%.
- Economists have been impressed by the report, although few believe the strength will continue in the second half of the year given ongoing concerns surrounding household spending.
- Despite strong growth, inflationary pressures remain weak. All agree this is unlikely to see the RBA lift official interest rates for at least another year. Some even think there’s a risk the next move could be down, not up.
Australia’s economy managed to defy the doomsayers once again in the June quarter of 2018.
Real GDP rose by 0.9%, higher than the 0.7% increase the markets had been expecting, leaving the increase on a year earlier at 3.4%, the fastest rise in close to six years.
Growth in the March quarter, previously reported at 1%, was also revised up to show an increase of 1.1%, contributing to the strength seen in the year-on-year rate.
Combined, GDP growth in the first half of the year topped 4% in annualised terms.
Big, in other words.
After a soft patch in early 2018, it was households that fuelled quarterly growth, contributing nearly half of the increase reported.
Strong spending at retailers was largely responsible for the result.
However, with average compensation per employee rising by just 0.1% over the quarter, it meant that households had to divert more money away from savings in order to fuel their spending, leaving the household savings ratio at just 1%, the lowest level since before the GFC.
Put bluntly, there isn’t much buffer for households to draw upon to sustain their spending levels unless incomes pick up or they choose to dis-save in the coming quarters.
At a time when home prices are falling in many parts of the country, there has to be a question as to whether that’s likely.
In what was an otherwise strong report, that was the one major fly in the ointment, keeping optimism over the consumer-led rebound in the June quarter in check, at least based upon the initial market reaction.
While markets have expressed cautious optimism, it’s time to see what economists have made of the report. Are there blue skies ahead or are the storm clouds starting to build after a stellar first half of the year.
Here’s a collection of the views we’ve received following the report’s release.
Felicity Emmett, ANZ
The strength of the GDP report vindicates the RBA’s upbeat messaging around the economy and the stronger starting point suggests that the Bank is likely to remain positive about the outlook. Our view is slightly more circumspect, with the strength in H1 unlikely to be repeated in H2, but growth to remain close to 3% over the next year or so. The contribution from housing will fade, and business conditions have eased from the highs suggesting profits and investment growth may slow from the current pace. Moreover, the low saving rate suggests consumers remain under pressure from ongoing soft income growth. This suggests that it will still be some time before spare capacity is eroded and as such inflationary pressures are likely to lift only very gradually, keeping the RBA on hold for some time yet.
While growth is very strong, inflationary pressures are very weak. The GDP deflator rose just 0.2%, and is 2.0% higher than a year ago. The core household consumption deflator rose a modest 0.3%, while the annual rate edged down to 1.2%. While this is well up from the trough of 0.6% recorded in the year to December 2016, it still suggests that inflationary pressures in the economy remain soft.
Tom Kennedy, JP Morgan
While stronger than we had expected, today’s print is consistent with our view that real GDP in 2018 would be heavily front-loaded, with growth to moderate through the second half of 2018 on the back of fading net exports and softer household spending.
In terms of the policy outlook, the Q2 outcome is close enough to the RBA’s implied forecast that officials may feel vindicated their current forecast set is broadly tracking. It also adds a little more credibility to the RBA’s guidance that the “next move in rates is up” and suggests the chances of a meaningfully dovish shift anytime soon remain small. The strong start to the year means growth can step down a touch without threatening the RBA’s 3.25% year-on-year December 2018 forecast.
Andrew Hanlan, Westpac
The Australian economy experienced a period of above trend growth over the past year, with GDP growth at 3.4% and non-farm GDP at 3.7%, which is the fastest annual pace since 2012. This is against the backdrop of relatively strong global growth.
Strong population growth and the need to lift investment to meet the needs of a growing population are key positive dynamics. Notably, government spending, in the form of public demand, is expanding at a brisk pace of almost 5%. Home building activity added to activity over the past year, but is likely to turn down from historic highs as we move into 2019.
Across the nation, economic conditions have become more synchronised. The drag from the mining investment boom is greatly diminished and commodity prices are up from the lows of late 2015, providing better cash flows for the mining sector and boosting government revenue.
Consumer spending appears to be running at a moderate pace, at 3.0% annual currently. However, on a per capita basis, spending growth remains lacklustre with ongoing weakness in wages growth a constraint. More recently, dwelling prices have eased from historic highs, as lending conditions tighten, a development which will weigh on the outlook.
Gareth Aird, CBA
Despite solid growth, the economy is not generating much in the way of wage or price pressures. That is largely because an output gaps still exists, albeit that it has narrowed. There is still plenty of slack in the labour market to chew through.
Once again, the income side of the ledger showed that employers currently have it better than employees. Company profits rose by 1.0% in Q2 to sit 8.8% higher through the year. In contrast, compensation of employees, which is basically the total income paid to workers, grew by a more sedate 0.7% over the quarter. Confidence in the outlook would improve if the robust economy flowed through to alift the pay packets of workers.
Looking further ahead, we expect the annual rate of GDP growth to continue to run at an above-trend pace. We have it sitting in the 3.25-3.5% range over the second half of 2018. The global backdrop remains favourable notwithstanding downside risks emanating from US trade policy and elevated corporate debt in some areas. And the local labour market looks likely to generate around 20,000 jobs a month which will should keep the growth pulse of the economy ticking along at a robust rate. Downside domestic risks are largely around the consumer given wages growth remains soft, some lending rates have lifted a little,dwelling prices are correcting lower and the savings rate can’t fall much lower.
At this juncture they are consistent with the RBA cash rate staying on hold until late next year.
Su-Lin Ong, RBC Capital Markets
The RBA will have welcomed today’s national accounts and decent pace of growth in the first half of 2018. It will give them greater confidence in their key macro forecasts which imply above trend growth, strong labour market and march towards full employment and eventual lift in wages and inflation. Its generally upbeat narrative is unlikely to be swayed despite a number of emerging risks — weaker housing market, independent increases in mortgage rates, greater political uncertainty, underwhelming Chinese growth and rising global trade protectionism.
As we have noted for some time now, we expect activity to be above trend but given the degree of slack in the economy, this will need to be sustained for some time before wages and inflation can firm with the international experience, suggesting this will be challenging.
In the face of some of these risks, RBA policy makers should now be debating whether the pace of activity in the first half is likely to continue. We suspect not. Indeed, July retail sales suggests household consumption has begun Q3 on a subdued note, confidence is mixed, and the housing market has weakened further. The prudent course of action remains for the RBA to remain on hold for the foreseeable future.
Diana Mousina, AMP Capital
The Australian economy continues to grow steadily, but looking ahead, it is difficult to see momentum lifting. The most significant near-term unknowns to growth include the negative impact of the drought on exports, the negative drag on consumers from slowing home price growth — and uncertainty as to how much more downside there is to prices — and any negative drag from global trade given US tariffs. So, the risks to the economic growth still remain to the downside.
As well, price pressures remain fairly muted across the Australian economy and while growth remains moderate, inflation is likely to remain at the low end of the Reserve Bank’s 2-3% target band. Against this backdrop, the Reserve Bank will be unwilling to raise interest rates. We still see the next move in interest rates being an increase, but this is unlikely to happen until the second half of 2020. And given the downside risks to the economy at the moment, there is still a chance that that the next move in interest rates will actually be down.
Paul Dales, Capital Economics
The surge in GDP growth in the first half of the year meant that the Australian economy notched up 27 years without a recession in style.Even if GDP were to rise by just 0.5% in both the third and fourth quarters, in the full calendar year the economy will have grown by 3.2%. As such, we have revised up our 2018 GDP growth forecast from 2.5% to 3.2%. The RBA’s recent upward revision to its own forecast, from 3.0% to 3.25%, looks like a smart move. But with house prices falling, credit conditions tightening and the support from the global economy fading, the second half of the year probably won’t be quite as good.
The resilience of consumption is both impressive and worrying! To some extent, consumption growth has been supported by a rebound in income growth over the past year. But the bigger prop has been the decline in the saving rate to a new post-GFC low of 1.0%. The clear risk is that the hit to net wealth from further falls in house prices prompts households to increase their saving rate regardless of what happens to income growth.
As the RBA had been expecting growth to be strong, these data don’t mean a rate hike is around the corner. But the markets may start to reconsider their view that rates won’t rise until sometime in 2020.
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