After surprising to the downside just a quarter before, the Australian economy astonished yet again in the final three months of 2016, growing by a brisk 1.1%.
That was higher than even the most optimistic economist forecast offered to Thomson Reuters, and left the year-on-year growth rate at 2.4%, well above the 2% level expected.
In nominal terms, adjusted for price movements in the quarter, the news was even better with GDP expanding by 3.0%, the largest increase since June 2010.
That left the increase on the same quarter in 2015 at 6.1%, the fastest increase since the September quarter 2011.
Whether in real or nominal terms, it was a strong quarterly performance, and a pleasing outcome following the shock 0.5% real GDP contraction seen just three months earlier.
Scott Morrison, Australia’s treasurer, certainly conveyed that view, noting that “Australia is growing faster than every G7 economy”.
“Our growth continues to be above the OECD average and confirms the successful change that is taking place in our economy as we move from the largest resources investment boom in our history to broader based growth,” he said.
In particular, Morrison was encouraged that the quarter was more broad-based across all the contributing sectors.
Now that Australia’s economic community has had time to time to digest the report, it’s time to see what they have made of it.
Is is a good sign for the remainder of the year, or were there any nasty surprises that were lurking below the headline strength?
We start with AMP Capital’s chief economist, Shane Oliver.
Shane Oliver, AMP
The overall sense from the GDP and the broader activity data is that the Australian economy remains in okay shape, but it’s hard to see a sharp further reacceleration of growth in the near-term. We see growth averaging around 2.5-3% in 2017.
Mining investment will remain a drag on growth, housing investment is positive but slowing, net exports will be a positive driver of growth but consumer spending may still be constrained. The big positive for Australia is in the sharp turnaround in nominal GDP, which is a measure of GDP that also allows for changes in prices. The upswing in nominal outcomes is also evident in the uplift in company earnings, observed in the just completed company reporting season. The strength in nominal incomes will flow through to governments and businesses, but the flow back to households may be limited given the constrained Federal budget and uncertainty around how long commodity prices can remain elevated.
The turnaround in Australia’s nominal income story, better activity data, stability in the labour market and excessive strength in the Sydney and Melbourne housing markets means that it will be hard for the RBA to cut the cash rate again in the months ahead unless we see a further leg down in underlying inflation. As a result we are dropping our forecast for another rate cut in May. Our base case is now for rates to be on hold this year. That said if the RBA is to do anything on rates this year a cut is more likely than a hike given the downside risks on inflation. A rate hike is unlikely until later next year.
Bill Evans, Westpac
The main sources of positive surprise were household consumption and business investment. After expanding by only 0.5% and 0.4% in the previous two quarters consumption lifted by 0.9% in the December quarter. That was despite a 0.5% contraction in nominal wage incomes, including a decrease of 0.9% in average earnings per employee.
The strong Q4 lift in consumer spending was funded by a sharp fall in the savings rate from 6.3% in the September quarter to 5.2% in the December quarter. This sharp fall is likely to be unintentional and unlikely to be sustained. If earnings growth does not recover prospects for consumer spending seem bleak.
On a brighter note, business investment surprised on the upside. This improvement appears to be attributable to mining activity. While the sudden improvement in mining seems unsustainable in the near term with major projects still running down there does appear to be some encouraging evidence that the recent surge in commodity prices is having a positive impact on mining spending.
For our part a key to the outlook is prospects for household wage incomes. Without a solid recovery in jobs growth and wages remaining insipid earnings growth will eventually create a major drag for consumption, and eventually, business investment. While we are unconvinced about any significant recovery in wages growth, prospects for employment over 2017 are more encouraging, as suggested by our jobs index.
We retain our view that rates will remain on hold throughout 2017 and 2018.
Kristina Clifton, Commonwealth Bank
The good news is that the economy has bounced decisively out of the Q3 GDP “pothole”. The better news is that the income dynamics underlying the economy have improved significantly. Australian economists can get back to boasting about our 25 plus years of economic growth and how we will soon overtake the Netherlands as the economy with the longest running economic expansion!
The main growth themes were still in place at the end of 2016. Growth is supported by the ramping up in resource exports, the residential construction boom, higher public spending and some surprising growth in consumer activity. Falling mining capex and weak non-mining capex remain the main growth drags.
Policy makers should be happy with today’s numbers. Growth continues, the infrastructure story is turning, the lower AUD is helping. There does not appear to be any need for extra interest rate assistance. The RBA will be noting that household debt rose by 1.5% in Q4 and nominal disposable incomes rose by only 0.2%. They will conclude that the debt:income ratio has increased further. And house price trends so far in Q2 probably mean a further lift.
Rate cuts are off the table. But rate rises are not on the table either.
Su-Lin Ong, RBC Capital Markets
The volatility in the quarterly GDP numbers of late suggest that the strong Q4 print should be viewed very much in the context of a pretty weak Q3. Averaging them out suggests a rather tepid quarterly growth rate 0.3% in H2 and even weaker in the non farm sector.
The more interesting and positive developments have been in national income and nominal GDP growth as the terms of trade troughed and have surprised to the upside, particularly in late 2016. The impressive gains in these measures in the quarter are unlikely to be repeated, but we note that that key commodity prices remain resilient and probably more enduring than expected.
The firmer nominal GDP and terms of trade trend, which looks likely to have continued in the current quarter, is likely to keep the RBA on hold in the coming months. Real activity, however, is likely to disappoint with downside risk to the RBA’s GDP forecasts and the inflation picture likely to provide scope to ease when these risks materialise.
Scott Haslem, UBS
Q4’s jump clearly puts the economy’s recovery back on track. As we flagged after Q3’s surprising 0.5% drop, most weak areas such as exports, residential construction and public capex were likely to rebound, as they did. Indeed, there’s much to like about today’s print, from the broad-based growth rebound, a long awaited rise in non-dwelling capex, the first rise in Western Australia demand in more than a year, and strong capital imports flagging better capex ahead. Moreover, RBA concerns the consumer may be turning weaker were quashed with a strong Q4 gain.
While mostly funded by lower savings, there’s reason to expect some of the very positive news on economy-wide income should filter through to better consumer earnings in the year ahead. These improving trends cement tightening as the next RBA move, but not until the second half of 2018.
Felicity Emmett, ANZ
As we expected much of the weakness in Q3 was temporary and growth bounced broadly across the economy. Even consumer spending rebounded, in spite of persistently low wages growth.
While there are a number of positives in terms of the outlook, including for business investment and the external accounts, the question remains as to whether growth in consumer spending can continue to outpace household income growth. Wages are the largest component of household income and the overall wages bill fell 0.5% in the quarter, while overall household income grew just 0.2%. Moreover, high and rising household debt in an environment of persistently low wages growth is likely to eventually crimp consumer spending in our view.
While growth was stronger across the board, the inflation indicators in today’s report were particularly weak. Weak wages growth is, however, dampening unit labour costs, which suggest that inflation is likely to stay low.
For policy, while the RBA will be pleased with the confirmation that the Q3 drop in activity was temporary, the weakness in wages and the implications for the inflation outlook are concerning. Nominal unit labour costs are a key input into the RBA’s underlying inflation models, and the persistent weakness points to an ongoing absence of domestic costs pressures.
In aggregate, we think the rate hikes are a very low way off and the RBA seems set to keep rates on hold for the foreseeable future.
Alan Oster, NAB
Solid economic momentum near-term will likely keep the RBA on the sidelines for much of 2017. While there is clearly spare capacity in labour and product markets, the RBA aims to balance its inflation and employment objectives against financial stability considerations, particularly given the surge in house prices in key markets in late 2016 amidst already high household debt levels.
We are not as sanguine about growth in 2018 as the RBA, and forecast a pull-back in 2018, as the contributions from LNG exports, temporarily higher commodity prices and residential construction fade, while household consumption remains constrained by weak labour income growth. Our year-ended growth forecasts do pick up to 3% by Q3 2017, but then drop to 2% by Q4 2018, much lower than the RBA’s 2.75-3.75%.
Current RBA optimism is expected to fade about the outlook later in 2017, and we see a 25bp easing in November 2017 as necessary to prevent a rise in unemployment and inflation undershooting again in 2018.
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