Australia's Economy Appears To Be Roaring, But Top Minds Still Think It Needs Help

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Australia’s economy is surging, according to the GDP numbers. The big question is now whether this momentum can be sustained into the rest of 2014.

Some economists from believe another cut in official interest rates is still needed to push the economy along from a resource-based engine.

Goldman Sachs says that despite the strong GDP number, financial markets and policy makers will quickly note that the growth was overwhelmingly sourced from the mining sector and that indicators for activity growth have deteriorated.

It its Australia Economic Outlook note, Goldman Sachs says:

“As evidence of ongoing weakness in non-mining activity accumulates in the coming months we continue to expect that the RBA will focus on the outlook – rather than the historical data – and look to ease interest rates in September 2014.”

The ABS numbers show that 80% of the GDP growth in the quarter was due to mining volumes rising, in part due to unusual weather patterns.

The non-mining measure expanded 0.1% in the quarter to just 1.9% over the year.

Goldman Sachs says:

“The future path for economic growth remains for a meaningful slowdown in the annual pace of GDP growth through 2014 and into 2015. Nothing has altered our core views for the outlook and in some ways we have become more concerned given the deterioration in some forward-looking indicators of late.”

JP Morgan today changed its outlook on interest rates following the strong GDP number yesterday of 3.5% annual growth.

“In a change of forecast, we no longer expect the RBA to trim the cash rate in August,” JP Morgan economist Stephen Walters says.

The “period of stability” RBA officials expect now looks likely to last well into 2015.

Walters says:

“We have changed the rate call, but have not made material changes to our macro forecasts, which continue to foresee below-potential output growth, rising unemployment, and benign inflation.”

Recent developments mean the RBA will be on hold official cash rates for some time.

He says:

“We do not forecast the first rate hike until the second half of 2015, by which time the base of growth in the economy should have broadened away from resource exports, household spending and home-building ought to have firmed, and AUD likely will be lower.”

Adam Boyton at Deutsche Bank says there is a world of difference between real GDP growth and the health or otherwise of the Australian economy.

He asks this question:

“Surely then with real GDP growth at 3.5% over the year and the interest sensitive sectors plus net exports showing such strong growth it is only a matter of time before the rest of the economy is dragged into the sunlight?”

Not quite. Australia’s terms of trade are likely to weaken this year as iron ore prices fall. And this means the pace of growth should slow considerably.

In a Parliamentary debate in 1995 John Howard, then Opposition Leader, used the phrase “five minutes of economic sunlight”.

“We think that phrase aptly describes current conditions in the Australian economy,” Boyton says.

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