- Economists believe Australia’s GDP report was generally strong, with the exception of the household sector.
- Many believe that annual growth is unlikely to accelerate in the quarters ahead, largely reflecting ongoing weakness in household spending.
- All agree that today’s report has no near-term implications for interest rate settings from the RBA.
Australian economic growth accelerated sharply in early 2018, helped by solid contributions across all parts of the economy.
According to the ABS, real GDP jumped by 1% during the quarter, the largest increase since late 2011.
It’s now been 106 quarters, or 26.5 years, since Australia last experienced a technical recession, defined as two consecutive quarters of negative growth.
Along with an upward revision to GDP in the prior quarter, now reported at 0.5% from initial estimate of 0.4%, it saw year-on-year growth lift to 3.1%, the fastest in nearly two years.
Importantly, that was well above the 2.75% level expected by the RBA just two months ago.
Growth was powered by a surge in commodity exports, recovering from temporary supply disruptions at the end of last year.
Exports alone contributed half of the quarterly increase. Along with solid contributions from government, dwelling and non-dwelling investment and a lift in business inventories, it ensured a standout headline print.
However, the news was not all good.
Masked by the strong growth contributions elsewhere, household consumption — the largest part of the economy — grew by just 0.3%, adding a smaller-than-usual 0.2 percentage points to quarterly GDP.
That reflected near-flat growth in retail sales as well as soft spending on services.
The ABS said growth was primarily concentrated in non-discretionary components, indicating that at a time when household income growth remains weak, consumer trimmed back on the little luxuries in life.
Compensation of employees — essentially total income paid to workers — rose by 0.5% over the quarter, an outcome that fits with separate data on wages released by the ABS.
At a time when average income growth is soft, households also saved less with Australia’s household savings ratio — measuring the proportion of income saved — falling to just 2.1%, the lowest level since December 2007.
In the absence of an unexpected, and unlikely, strong pickup in wage growth in the period ahead, it means households have little buffer left to maintain spending levels unless they start to borrow.
In an otherwise strong economic report card, the performance of the household sector was the fly in the ointment.
As the biggest part of the Australian economy, this remains an area of concern, especially at a time when property prices are falling in Sydney and Melbourne, home to around 40% of Australia’s population.
It’s little wonder why the RBA describes household consumption as “one continuing source of uncertainty”.
Now that they’ve had time to digest the report, let’s see what Australia’s economists have made of it.
We start with CBA’s Gareth Aird.
Gareth Aird, Commonwealth Bank
The Australian economy has kicked off 2018 with a solid lift in output. Employment growth was strong over the past year, but the output side of the economy over 2017 hadn’t reflected the lift in headcount. Today’s figures suggest there’s been a convergence.
Despite strong growth, the economy is not generating much in the way of wage or price pressures.
The news in today’s data was better for employers rather than employees. Company profits rose by a sizable 5.2%. In contrast, compensation of employees, which is basically the total income paid to workers, grew by a more sedate 1.2% over the quarter. Over the year, the total employee wages and salaries bill has rose by 5.1%, its strongest rate of growth since Q2 2012. The big lift in employment has driven the increase despite the weakness in wages growth. The Government’s coffers have been boosted as a result.
Looking further ahead, we expect GDP growth to sit around 2.75 to 3% per annum for the next few quarters. The global backdrop remains favourable notwithstanding geopolitical risks. 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 healthy rate.
Given Australia’s strong population growth and rising labour force participation, it’s going to take a few years of 3% plus growth if the unemployment rate is to fall to 5%, the RBA’s estimate of full employment. As always, there are risks to the economy outlook. The downside domestic ones are largely around the consumer given wages growth remains soft and dwelling prices are correcting lower.
Tom Kennedy, JP Morgan
Today’s result is strong, though does not change our view that Australia’s longer run growth prospects remain challenged and less upbeat, with household consumption to remain hamstrung by benign wages growth and an already low saving rate. With Australia’s saving rate already at historically low levels and wages likely to increase only very gradually, it appears the most likely outcome is for households to tighten the purse strings and for spending to slow.
Private capex should offer somewhat of an offset, though the recent data has surprised to the downside and evidence of a sustainable recovery remains elusive. Momentum in private final demand has slowed over the past 18 months, which is not an encouraging sign given the RBA’s assertion that policy remains accommodative. The bright spot in recent years has been government investment, though based on the data at hand, it appears the peak impulse from public capex to growth has now passed and is therefore unlikely to be a panacea for Australia’s growth challenges.
Today’s data will give the RBA further confidence in its view that the next move in rates is likely to be up. However, robust household consumption outcomes will be required for that view to be realised, and today’s data don’t play to script. But the RBA will be patient, and likely give that narrative at least another 2-3 quarters to develop. In the meantime, rates are firmly on hold.
Su-Lin Ong, RBC Capital Markets
The composition of growth in Q1 is likely to provide a bit of a blueprint for the year and 2019 underscoring a number of our long held themes. We expect growth to continue to be driven by three key components – net exports, public spending and a rise in non-mining capex. A more subdued consumer remains our long held base case amid ongoing structural headwinds with the added challenge of a weakening housing market.
The RBA would have welcomed today’s national accounts and will likely downplay the weaker consumption component given the gain of Q4. [It] likely reaffirm its base case for a return to 3% plus growth, a stronger labour market and gradual pick up in wages and inflation. Its positive narrative will remain intact.
We remain more cautious on the outlook for activity and we note that Australia will need a sustained period of above trend growth and above average employment generation given the degree of slack in the economy. This slack, best captured by an unemployment rate that remains around 0.5 percentage points above NAIRU, suggests that even if the RBA’s above trend 3% plus GDP forecasts are crystalised, any lift in wages and inflation will likely be modest over the next two years consistent with the international experience.
Andrew Hanlan, Westpac
The Q1 accounts highlights some key positives, which will continue to support activity in 2018 — notably public demand, exports, as well as business investment. However, the national accounts while comprehensive are a little dated.
Some recently developments have been less encouraging. Importantly, jobs growth has slowed which will dampen wage income growth. A slowing in jobs growth was always likely after the hiring burst of 2017, which was in part a catch-up for an undershoot in 2016 around the Federal election.
Also, some key negatives remain, notably in the housing sector, which is cooling as lending conditions tighten. House prices continue to pull-back from their highs and home building activity, while up in Q1 is likely to decline during 2019, down from historic highs. Also, as noted, a question mark remains around the consumer as wages growth remains weak, debt levels high and as house prices ease back from their highs.
Shane Oliver, AMP Capital
While the March quarter GDP data shows that the Australian economy started the year strongly, we still expect Australian growth in 2018 to be a little below the RBA’s forecast of “a bit above 3%” because of a constrained consumer and a slowing housing market. And while non-mining business investment is rising, public infrastructure spending is surging and the labour market is strong, there are few signs of noticeable cost pressures as the economy is still running below its capacity as indicated by high levels of labour market underutilisation.
Growth needs to be stronger on a sustained basis to work through this spare capacity and lift wages and inflation. We remain of the view that the constrained inflation backdrop will keep the Reserve Bank on hold until early 2020 at least, when we see the central bank starting to lift interest rates. But, given the weakness in home prices and the negative wealth effect that will flow from that its premature to rule out the next move in official rates being a cut.
Paul Dales, Capital Economics
We doubt that the strength of net exports will be sustained as some of it was due to a catch-up after production problems in the middle of last year. But we fear that the combination of low real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.
Admittedly, last year’s leap in employment is boosting nominal income growth. The 2.4% rise in compensation per employees, per hour in the past year is the largest gain in over three years. But that’s still low by normal standards. And real disposable income growth, which is a more important determinant of real consumption, rose by just 1.1%. By falling from 2.3% to 2.1%, the nominal household saving rate is at a 10-year low. So households aren’t in great shape.
The good start to the year means the risks to our 2.5% 2018 forecast lie on the upside. But the RBA’s 3.0% forecast is still not guaranteed. In any case, with the Royal Commission casting a cloud over future lending conditions, the RBA probably won’t raise interest rates this year or for a lot of next year either.
Felicity Emmett, ANZ
The strength was concentrated in net exports and public spending, while growth in household consumption was softer after the strong gain in Q4. Measures of inflation continued to lift, although they remain low by historical standards. The result highlights the ongoing patchy nature of the recovery.
The RBA is likely to be relieved with the rebound in growth, but cognisant that the outlook is far from assured. While business conditions remain buoyant, the household sector remains under pressure from soft wage growth, a low saving rate and weakening house prices. The risks to the global economy have also increased. In this environment, and with inflationary pressures still modest, the RBA is clearly on hold for some time.
Paul Bloxham, HSBC
We have been optimistic on Australian growth for 2018 for quite some time now. Our key narrative has been that the lift in commodity prices, driven by an improving global backdrop, would deliver more national income, supporting a pick-up in growth and, eventually, some more inflation. In short, the negative income shock of 2011-2016, from falling commodity prices, was set to turn to a positive income shock on the back of the global growth wave.
At the same time, the lift in growth is yet to feed into a material pick-up in price and wage pressures. Until wages growth and inflation start to pick up more materially, the RBA is set to keep its cash rate on hold. Of course, from their perspective the current state of affairs is really not that bad. Growth is above trend, inflation around the bottom edge of the 2-3% target band and jobs growth remains solid. However, the RBA needs growth to continue and the unemployment rate to fall, if inflation is to head back to target.
Looking ahead, we see continued above-trend growth through this year. Although the housing market is cooling in Sydney and Melbourne, which is a key focus for market observers at present, this is happening at the same time that conditions in the mining sector are improving. And, the largest part of the Australian economy, the services sector, continues to show solid growth. Plus, infrastructure investment is continuing to ramp up. We have an above-consensus view that GDP growth will run at 3.2% for 2018 as a whole. We think this will gradually lift wages growth and inflation.