What analysts are saying about Australia's GDP miss

Australia’s economy grew by an anaemic 0.2% in the three months to June, the slowest quarterly growth since the March quarter of 2011, leaving the annual pace of growth at a near two-year low of 2.0%.

Markets had been expecting a quarterly increase of 0.4%, something that would have left annual growth at 2.2%.

It was a big miss, and somewhat disappointing.

With the research reports starting to roll in, it’s time to see what Australia’s leading economists make of the underwhelming result.

According to Michael Workman, senior economist at CBA who had been forecasting quarterly GDP of 0.5%, external factors will present a challenge to the growth outlook in the years ahead.

“Looking ahead, it is clear that Australia’s external environment, namely commodity prices and trading partner growth, will present challenges over coming years”, says Workman, adding “lifting national incomes will require some consistent economic reforms aimed at lifting national productivity and enhancing competitiveness”.

Given the GDP reading was in line with the RBA’s August forecasts, along with recent statements from the bank that another rate cut is unlikely, he has not changed his view that the cash rate, at 2.00%, has bottomed.

Felicity Emmett, the co-head of Australian economics at ANZ who correctly predicted the Q2 growth rate, described the result as “soft”, although she believes the Q2 figure probably understates momentum in the economy, just as the Q1 figure overstated it.

“Even if taken together with the 0.9% q/q rise in Q1 it suggests growth remains anaemic. GDP was held down by a significant subtraction from net exports, but business investment also fell and household consumption growth remains soft. A strong contribution from public demand boosted overall growth. Today’s report continues to suggest the non-mining recovery remains very patchy, and with the international environment deteriorating the risks to the cash rate remain tilted to the downside”, says Emmett.

“Looking at the first two quarters together given that some sectors were boosted by unseasonably good weather in the first quarter, with some payback in the second quarter (ie resources exports and residential construction) shows annualised growth for the first half of the year came in at 2.1%. This is similar to annual GDP growth of 2% and suggests that momentum in the economy remains quite weak”, she added.

Like the CBA, Emmett suggests that with GDP growth in line with RBA forecasts, they expect interest rates will remain on hold, with “risks of further easing”.

Scott Haslem, George Tharenou and Jim Xu, UBS’ Australian economics team, shares the view presented by CBA and ANZ.

“Today’s Q2 GDP data added further evidence that the economy’s pace of growth has been slowing over the past year, from near 3% in early-14 to just 2% mid-15. No doubt there are positive trends in the consumer & housing sectors, helped by low rates and a recently improving jobs market, while exports will add much to growth as supply comes on-line in 2016. But the headwinds of a capex downturn and slower growth offshore, particularly in China, via weaker commodity prices and earnings, continues to weigh heavily on domestic real incomes and demand via a business capex drought with little available fiscal support (notwithstanding Q2’s likely one-off spike). This is consistent with ours (& the RBA’s) near-term outlook for below-trend GDP growth of just 2-2½% and a cash rate unchanged at 2.0%”, they note.

While CBA, ANZ and UBS remain firm on their belief rates are unlikely to be reduced further, Daniel Martin, senior Asia economist at Capital Economics, suggests the growth slowdown “could bring rate cuts back on the agenda”.

Martin suggests that risks to his GDP forecast of 2% in 2015 may be to the downside “with the chances of a recession now larger than at any time in the last 24 years”.

“Today’s data could also bring rate cuts back onto the agenda. The Reserve Bank expects growth of 2.25% in 2015 and 2-3% in 2016, and there is now a serious risk that those forecasts will prove overly optimistic”, says Martin.

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