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JP Morgan says the soft underbelly of Australia's economy is about to be exposed

Photo: Cameron Spencer/ Getty Images.

JP Morgan has downgraded its forecast for Australian GDP growth in the first half of this year.

Analyst Ben Jarman said weakness in net trade would be the main cause of lower growth, as exports fall on the back of supply disruptions to coal and LNG production.

He subsequently downgraded his forecast for 2017 growth to 2.1% from 2.8%, with significant reductions in Q1 and Q2:

Jarman cited the importance of net trade to Australia’s recent growth, given the recent weakness in domestic demand.

“Net trade has consistently contributed over 1 percentage point to growth per year since 2013, as major capacity expansion projects in the export sector reached completion (first coal, then iron ore, and LNG),” he said.

In view of that, Jarman said that growth forecasts have “significant sensitivity” to any supply shocks.

He said that flooding from Cyclone Debbie had caused a material reduction in Queensland coal supply. Furthermore, those losses won’t be covered in later periods because the industry was already operating at full capacity prior to the disruption.

Queensland coal shipments have fallen sharply, from around 10 million tonnes to below 5 million tonnes:

Jarman said that the LNG industry also suffered “significant outages” in April and May.

The negative effects on growth resulting from falls in LNG production will be exacerbated, given the high rates of growth that the sector had been contributing.

This chart shows the recent downturn after a steady rise in exports from fuels including LNG:

Jarman said that given the importance of net trade to GDP growth, the unexpected supply disruptions in the first half of this year have exposed the “weaker underbelly” of the Australian economy.

It’s cause for some concern, given the doubts around the strength of consumption-based growth in Australia due to low wage growth and high house prices.

Those concerns have been echoed by both analysts and Reserve Bank of Australia (RBA) governor Philip Lowe, who cited weaker household spending in a recent speech on the housing market.

Jarman noted “downside risk” to growth projections in the second half of 2017 as well, if the recent halts to LNG production are pushed into the 2018/19 financial year.

JP Morgan’s growth projections are now somewhat at odds with the RBA’s forecast in the minutes from its May meeting.

The RBA said it was still hopeful that domestic consumption will get a slight uptick later this year, leading to growth slightly above 3% by the first half of 2018.

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