Out of the blue, Australia’s Q2 GDP is suddenly looking good

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While we’re yet to receive the largest component — household consumption — Australia’s Q2 GDP report, due out tomorrow, is suddenly looking good.

That’s a stark turnaround in the view seen just days ago following the release of underwhelming retail sales and construction volumes for the quarter.

Following the release of net exports and government expenditure figures earlier today, along with a surprise contribution to GDP growth from inventories data released yesterday, economists at UBS are forecasting a quarterly increase in real GDP of 0.6%, noting that risks to this above-consensus view are to the topside, not downside.

Huge. UBS quite rightfully ask the question whether Australia is “the miracle economy”.

If it’s on the money, it’ll leave real GDP growth over the past year at 3.5%, a level well above trend and one that has not been seen since 2012. It will also extend Australia’s run without experiencing a technical recession to 100 consecutive quarters.

After contributing significantly to growth in the March quarter, net exports will slice 0.2 percentage points off GDP tomorrow, thanks largely to a boost in import volumes during the quarter.

Export volumes rose by 1.3% over the quarter, although this was less than the increase in import volumes which rebounded by 2.7%.

“This means net exports volumes will subtract a 0.25 percentage points (ppts) from real growth, albeit after Q1’s massive contribution of 1.1ppts,” said UBS.

While net exports will detract from growth, that was more than offset by a surge in government expenditure, it said.

“Q2 public demand volumes surged much more than even we expected, up 4.5% q/q, one of the largest rises on record,” said the bank.

Both government consumption (1.9%) and investment rose strongly (15.5%) in the quarter, combining to add around around 1.0 percentage point to real GDP.

Source: UBS

“This sees us (again) revise up our Q2 GDP forecast to 0.6% q/q (was 0.4%) and 3.5% y/y, which would be the fastest pace since 2012,” says UBS, noting that “headline public demand numbers still imply upside risk”.

“This would also provide support to our recently more positive growth outlook, where we revised up 2016 to 2.8% y/y and 2017 to an above consensus 3.0% y/y. Given this, we continue to expect the RBA to hold rates ahead, and don’t expect an (explicit) easing bias at their meeting later today.”

In research notes received following the release of today’s GDP inputs, economists at CBA look for real GDP to increase by 0.5% in the quarter, leaving the annual growth rate at 3.4%.

The ANZ is more cautious, penciling in a 0.4% quarterly growth rate, in line with the median market forecast.