While Australian economic growth came in well above expectations in Q1 2015, up 0.9% leaving the annual pace of growth at 2.3%, the drivers of expansion – exports and inventories – may be about to go from hero to villain in the upcoming June quarter GDP release.
With domestic demand likely to remain subdued, UBS economist George Tharenou believes Australia’s economy – courtesy of a “payback” from inventories and exports – may have contracted in the June quarter.
Here’s Tharenou on the drivers of growth in the March quarter, and why they may do the opposite in Q2.
“Australia’s Q1-15 real GDP surprised on the upside (0.9% q/q, 2.3% y/y), albeit still the slowest y/y since 2013. However, this was boosted by a (partly weather-related) surge in exports (5% q/q, 8.1% y/y fastest since the 2000 Olympics), and a large contribution from inventories (0.3%pts, 0.6%pts y/y) amid flat domestic demand. But looking ahead, Q2 data suggest some payback, as exports likely fell, and inventories should also drag GDP amid the ‘capex cliff’. While even our (below consensus) GDP forecasts don’t meet the traditional definition of a recession (i.e. 2 consecutive quarters of negative real GDP), there is a higher than normal risk of at least 1 q/q contraction in the rest of 2015”.
While Tharenou suggests the economy may have contracted in the June quarter, he believes that if it occurs, it will likely be a “phantom recession”.
Here’s what that entails:
“Rather than a broad downturn including housing & consumption, a ‘recession’ would more reflect the timing of an intensifying (private & public) capex cliff in 2015, ahead of the big boost from the full ramp-up of LNG exports in 2016. While unemployment already hit a 13-year high of 6.3%, & there is some risk jobs will follow the capex cliff, still solid employment growth (& hiring intentions) imply unemployment should not spike enough to see a ‘negative feedback loop’ on asset prices & banks. That said, amid worries about China (& global growth), the recent share market slump is now causing household wealth to fall, & could see a relapse in consumer & business confidence. This risk matters because amid weak wages & a record spike in debt, consumption is reliant on record low interest rates & confidence to drive a further drop in the household savings rate.”
Although he believes any potential contraction will be short-lived, Tharenou suggests the outlook for growth isn’t good.
“The risks to GDP (2.2% in 2015 & 2.6% in 2016), RBA cash rate (2% ahead), Budget balance, & AUD (0.7USD end-15) remain to the downside,” he says.
Australian Q2 GDP will be released by the ABS on Wednesday next week. Partial GDP inputs begin to arrive this week with the release of Q2 building work completed today and business capital expenditure tomorrow.