The prospects of Australia recording another negative growth quarter — the second in the past three — have diminished significantly following the release of March quarter business indicators from the ABS earlier today.
But while the prospect of Australia entering its first technical recession in over 25 years looks like it has been snuffed out in the near-term, there’s still plenty of concern about the longer-term outlook for the economy.
According to the ABS, non-farm inventories jumped by 1.2% in the first three months of the year, easily topping forecasts for a smaller increase of 0.5%.
As a result of the inventory build, it’s expected to contribute a hefty 0.4 percentage points to real GDP in the March quarter, making it harder for a negative growth figure to be recorded.
Weakness in retail sales volumes, residential building and business investment during the quarter saw expectations for GDP growth get scaled back significantly in recent weeks, leading some such as the National Australia Bank and Morgan Stanley to forecast that the economy likely shrunk in the first three months of the year.
Those fears, along with a plethora of headlines over the weekend suggesting that the economy may be on the cusp of falling into a recession for the first time since, appear to have been allayed somewhat by today’s data.
Data on government spending and net-exports in the March quarter, released tomorrow, will help to cement expectations further ahead of the GDP release on Wednesday.
Given the data inputs received so far, it looks like the economy continued to expand, albeit at a far slower pace than the final quarter of last year.
However, while today’s data means that it will be now harder for a negative growth figure to be reported, there was enough in today’s data to suggest the outlook for growth longer-term remains weak.
According to JP Morgan, not only does the inventory data point to a slowdown in growth in the June quarter, continued weakness in employee wages also raises the prospect that household consumption — the largest component within the economy — may also soften further.
“The mix of today’s inventory data has negative implications for upcoming quarters and is consistent with our recent first half growth downgrades,” said Tom Kennedy, an economist at JP Morgan.
“Indeed, iron ore inventories are expected to move lower, while replacement purchases of consumer items in Queensland following Cyclone Debbie will also put downward pressure on retail inventories.”
So there are risks that the boost to Q1 GDP from inventories may be reversed in the current quarter, continuing the seesaw pattern that has been a near-constant in recent quarters.
And along with the expected drag from inventories, continued weakness in employee wages also creates downside risks for growth, says Kennedy.
“The weakness in firms’ wage and salary payments — rising just 0.3% in the quarter — is also notable, and given our consumption forecast, would be consistent with the savings rate having fallen further in Q1,” he says.
That suggests that households may have diverted more money from savings to spending on goods and services during the quarter given continued weakness in incomes growth.
That may help to underpin consumption in the March quarter, and with it economic growth, but it cannot last indefinitely in the absence of a lift in incomes or a pickup in household borrowing.
ANZ, in a note following the release of today’s data, said that paltry increase — following a 0.5% decline in the final three months of 2016 — left annual growth in wages at just 0.9%.
“This weak result will see wages continue to weigh on GDP growth,” ANZ said. “The persistent weakness, along with ongoing lack of inflationary pressure, will continue to worry the RBA.”
Kennedy from JP Morgan shares that view.
“We remain of the view that the economy will perform below trend this year which calls into question the RBA’s view that monetary conditions are accommodative enough,” he said.
On those grounds, it’s easy to see why some retain that the view that the RBA’s easing cycle has not come to its conclusion yet.
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