Australia’s economy posted solid growth in the June quarter, recovering after weather-impacted slowdown in the first three months of the year.
Real GDP rose by 0.8%, supported by a lift in household consumption, government spending and a large lift in exports.
Although slightly below forecasts for an increase of 0.9%, it was a reasonable result after a far smaller 0.3% expansion in the prior quarter, leaving the year-on-year rate unchanged at 1.8%.
Still, sitting around one full percentage point below trend, the annual rate suggests Australia’s economy isn’t performing anywhere near its potential in the middle of 2017.
However, GDP is dated, capturing information from some five months ago, and it’s what happens next, rather than what has happened, that is of greater importance.
The Reserve Bank of Australia (RBA) thinks there are brighter days ahead, forecasting that GDP will accelerate to above 3% in the coming years.
Others, however, aren’t anywhere near as optimistic.
Now that economists have had time to digest the GDP report, it’s time to see what they’ve made of Australia’s latest economic health check.
Is the rebound seen today a sign of things to come, or is this just a temporary blip on what has recently been a downward trajectory?
Let’s find out.
Gareth Aird, Commonwealth Bank
On the surface today’s numbers are solid. The output side of the economy looks relatively healthy and in our view, we should see some further strength in real GDP growth over H2 2017. But there is more to the economy than just output. Weak household income growth continues to weigh on the consumer. And flat real wages growth indicates that workers are not sharing the productivity dividend that is evident in positive GDP per capita growth. As a result, the disparity between consumer and business confidence is likely to persist.
Today’s GDP result was right in line with the latest RBA forecasts, so they don’t shift the monetary policy dial, especially as the inflation reads in today’s data were uniformly low. Rates will stay on hold until wages growth and core inflation are on a sustained upward trend. And while the recent data flow has been encouraging, we think that we are still some way off seeing a lift in economic activity flow through to firmer prices and wages. The next move in rates is up. But we don’t think it arrives until 2018. As such, market pricing implying an 80% chance of a rate hike over the next year looks too ambitious, in our view.
Paul Dales, Capital Economics
The rise in GDP in the second quarter overstates the health of the economy as it needs to be taken in context of the weak first quarter. The underlying rate of growth is probably more like 0.5-0.6% quarter-on-quarter, or 2.2% a year. What’s more, there is precious little evidence of the rise in wage growth that the RBA is banking on.
Overall, the decent increase in GDP in the second quarter does mean that growth this year as a whole could be a touch stronger than our 2.0% forecast. But the slump in real household income growth and the weakening outlook for dwellings investment suggests to us that the RBA’s GDP growth forecast of 3.0% in 2018 is too optimistic. We believe 2.5% will be nearer the mark, which will force the RBA to keep interest rates at 1.5% until late 2019. That would be roughly a year later than the financial markets expect.
Felicity Emmett, ANZ
The second half of the year is shaping up to be solid. Business conditions remain elevated, while leading labour market indicators suggest that employment should continue to grow solidly in the near term. The substantial amount of work in the pipeline for both public and private non-residential building will also support growth in H2 2017. Housing looks to have peaked, but, given the amount of work in the pipeline, we expect only a gradual fall over the rest of this year. The consumer remains a key risk to the outlook, given the toxic combination of high debt and low wage growth.
For policymakers, these numbers should provide some encouragement on the growth front but little on the inflation front. This week’s RBA statement and Governor Lowe’s speech last night suggest that the RBA is becoming increasingly confident with the trajectory of the economy in terms of activity and the labour market although it rightly sees the consumer as a risk and would be disappointed with the ongoing weakness in wage growth. For this reason, we remain comfortable with our view that the Bank will keep the cash rate on hold at least until end-2018.
Riki Polygenis and James Glenn, National Australia Bank
There are certainly some positive signs in the data, including for business investment and government investment. This fits with the RBA’s upbeat view on the economic outlook, is consistent with the next move in rates being up rather than down, and raises the risk that the RBA may hike sooner than we currently expect in 2019.
We do retain a degree of caution however — particularly when the outlook for key pillars of growth such as wages and consumer spending are clouded amidst structural changes in the labour market and high household debt levels, the exchange rate has risen, and there is a risk that the dwelling construction cycle may be peaking earlier than expected. In this environment, the inflation targeting central bank will need to be more confident that wages and underlying inflation will pick up in a sustainable fashion.
Measures of wages and inflation were weak. Average compensation of employees — a broad measure of wages — declined 0.1% in the quarter, and is just 0.1% higher over the year. This is weaker than growth in the wage price index of 1.9% year-on-year, suggesting compositional shifts towards lower paying jobs continues.
Stephen Walters, Australian Institute of Company Directors
The rate of growth in the economy over the past year remained unimpressive at a sluggish 1.8% year-on-year in Q2, the same rate as in the year to Q1, which was the weakest pace of expansion since 2009, in the aftermath of the GFC. This sub-trend growth rate reflects the poor outcomes in the last quarter and in the second half of 2016, in particular. Recall that the economy actually shrunk in Q3 last year.
The economy, therefore, still is growing below our potential growth rate — an effective speed limit — which most economists estimate to be just below 3%. We, therefore, are not fully utilising the available resources, meaning the jobless rate is unlikely to fall, unless growth accelerates, of course. It follows that the lift in wages and inflation forecast by the RBA probably remains somewhere in the middle distance. The persistence of a record low cash rate has not yet succeeded in lifting GDP growth back to trend, or inflation back to target.
In summary, it still can be said that Australia’s economy is not firing on all cylinders, despite today’s improvement. To be fair, the lingering impact of tropical cyclone Debbie, which struck the east coast in late March, damaged GDP growth in Q2, including by suspending coal exports. This temporary weather-related drag will be reversed in the current quarter, another sign that better news on the economy probably lies ahead.
Ben Jarman, JP Morgan
Looking ahead, it is likely that coal exports recover from Q2’s flood-related disruptions, adding to growth in the near-term, though this may be trimmed by a slower ramp-up in remaining LNG capacity from here. Also it seems likely that consumption slows from Q2’s pace for the reasons mentioned above. At this very early stage we are tracking 0.7% quarter-on-quarter for Q3. Were this to be realised, the annual rate of growth would bounce to 3.0% year-on-year in Q3, from the current 1.8%.
The broader drivers of the growth trajectory are the acceleration in capex next year as the mining drag fades, which will be complemented by further gains in real export from LNG. However, real income and balance sheet constraints faced by households will ensure that any pick-up in growth is capped below potential (3%), leaving unemployment stubbornly above the natural rate and core inflation below target.
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