Economists give the surprising Australian GDP data the thumbs up


For the second quarter in a row, Australia’s economic growth has beaten expectations.

In the three months to December the economy expanded 0.6%, above forecasts for a gain of 0.4%, leaving the year-on-year growth rate at a two-year high of 3.0%.

The increase, the 19th quarterly rise in a row, extended Australia’s stretch without entering a technical recession to 24.5 years, second only to the Netherlands for a developed economy.

In what is a rare occurrence nowadays, the reaction from economists has been near unilateral to the result: it’s impressive, and indicative of an economic transition that is only gathering pace at present.

Here’s what the economists have made of the upside beat, starting with Gareth Aird of the Commonwealth Bank.

Gareth Aird, CBA

Momentum in the Australian economy lifted over the second half of 2015. The improvement in the labour market over that period paints a similar picture. Today’s data suggests that the ABS job numbers at the end of 2015 were telling the correct story of an improving labour market.

In the face of the ongoing decline in mining-related investment, economic growth at 3.0% is to be commended. But income growth commensurate with the early recession of the 1990s remains a concern. It reflects a big decline in commodity prices which puts downward pressure on wages, company profits and government revenue growth. And it is why the economy feels weaker that the headline GDP numbers imply.

Today’s GDP data is consistent with monetary policy on hold. GDP growth came in ahead of the RBA’s latest forecasts. And as Governor Stevens reiterated yesterday, employment outcomes are the key ingredient in policy decisions at present.

The next read on the labour market will help shape near-term rate expectations. We have the RBA on hold in 2016.

Matthew Hassan and Andrew Hanlan, Westpac

The December quarter National Accounts revealed a more resilient performance by the Australian economy than expected, at a time of ongoing strong headwinds.

Consumers were the key source of upside surprise in the December quarter, with spending increasing by 0.8%. That follows a 0.9% rise in Q3, revised up from a 0.7%. Annual consumer spending is now a solid, but not strong, 2.9%.

The National Accounts also highlight the marked divide between the major non-mining states of the east, of NSW and Victoria, where state final demand growth is robust, and the decline in state final demand in the mining state of WA.

For the RBA, the December quarter national accounts will come as a welcome surprise. The RBA was forecasting growth to return to 3.0%, but not until December 2016.

For 2016, the uncertainty is whether the momentum of the past half year will continue as countervailing forces continue to impact the domestic economy. Consumer spending is being ‘funded’ by a sharp drop in household saving flows, raising some question over the extent to which it will be sustained. In 2016, building activity is set to moderate, as home building crests and commercial building turns down.

Felicity Emmett, ANZ

The strength in household consumption in the quarter, combined with a significant upward revision to Q3 is particularly encouraging. Given the outlook for non-mining investment remains particularly difficult, an acceleration in household spending is vital if the non-mining recovery is to gain traction. Today’s numbers suggest this is occurring.

The economy continues to face a number of headwinds, but those headwinds are fading. Sharply falling mining investment and commodity prices will continue to be a drag on GDP growth for some time, but the drag from mining investment will peak in the current financial year and commodity prices look to have bottomed.

The economy clearly finished 2015 on a strong note, but we are not out of the woods yet. The unemployment rate remains elevated and further inroads are necessary before the RBA can sit back and feel as though its job is done.

Alan Oster, NAB

Today’s GDP figures provide reassurance that the Australian economy remains resilient amidst an uncertain global backdrop and weak commodity prices.

The composition of the figures was particularly encouraging. Household consumption was strong at 0.8% q/q, and the household savings ratio dipped to 7.6%, the lowest since before the GFC.

Today’s figures suggest the recovery across Australia’s non-mining economy remains on track despite considerable challenges. Strong output growth in Q3 and Q4 also gives more substance to the fast growth in employment in the second half of 2015. While the RBA remains alert to heightened global risks and retains a clear easing bias, resilience in the domestic economy suggests the bar for further easing is high.

Scott Haslem, UBS

This was an undeniably strong print.

There were also some pleasing signs within the data, with an improving trend in public demand, ongoing housing strength and further pick-up in the consumer to a real 3% pace. Indeed, together, consumer & housing are worth 2.1%ppts of the 3.0% y/y, while net exports have added their least percentage share in 3 years.

The cautionary tones come from the ongoing ‘recession’ in economy-wide income, persistent capex drag and the consumer funding their spending from saving (now a 7-year low).

This leaves us still forecasting ‘muddle-through’ growth of 2.5% over the coming year, albeit with growth now 0.5ppts faster than the RBA’s forecast, it seems like ‘rates on hold’ for now.

Shane Oliver, AMP Capital

The mining boom ended around four years ago and yet the Australian economy has still not fallen into the recession that many feared, with non-mining activity helping the economy continue to grow.

Looking ahead the drag on growth from the unwind of mining investment is set to continue, with the latest business investment (capex) plans from the ABS point to mining investment falling at the rate of 35% or so over this financial year and next and continued softness in investment overall. This is knocking around 1 percentage point off annual economic growth.

More broadly, several other factors are likely to weigh on growth going forward including steep falls in commodity prices that continue to cut into national income growth, household reluctance to take on more debt and subdued levels of confidence.

With growth likely to slip back to around 2.5% this year and inflation likely to remain low we remain of the view that the Australian economy will require further help. As such, we continue to expect that the RBA will cut the cash rate again in the months ahead. However, with growth exceeding expectations last year and the job market holding up well it’s now a close call.

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