Why Australian GDP could surprise everyone

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There is a little equation that economists use when they are calculating GDP. That equation is simply GDP = C+I+G+(X-M). The long hand translation is gross domestic product (growth) equals consumption plus investment plus government plus exports minus imports.

As you’d guess, just like GDP is made up of a number of inputs so too are the C, I, G and X-M components in the equation.

Today’s business indicators released by the Australian Bureau of Statistics tells the market how inventory, company profit, and wages data will feed into Wednesday’s third quarter GDP release.

The combination of releases looks to put some upside impetus into Wednesday’s release according to Westpac’s Senior Economist Andrew Hanlon.

Here’s his take on what the data all means:

The survey was more positive than we anticipated, particularly around incomes.

Inventory levels were little changed in the quarter, +0.1%, vs Westpac f/c -0.5%. This broadly flat result was despite a decline in imports, which pointed to the risk of an inventory rundown.

Inventories will be neutral for Q3 GDP, (vs Westpac f/c -0.2ppts).

Company profits rose 1.3% in the September quarter. That was broadly in line with market expectations but stronger than we expected (market median +1.0% and Westpac -1.0%). Mining profits were the surprise, up 6%, despite the slump in global commodity prices. We anticipated a flat result, with lower global prices offset by a lower AUD.

Profits across the broader economy were little changed in aggregate, meeting our expectations. Note, that on an adjusted basis (to be more consistent with the national accounts measure), profits rose 2.4% vs Westpac f/c flat.

Wages and salaries (i.e. the wages bill) made a moderate gain in Q3, up 1.0%, a little above our expectation of 0.8%. Note that employment levels and hours worked have made solid gains of late, with strength in home building activity and the service sectors. Although, most hourly wage measures remain weak, reflecting a number of negatives at present.

Implications for Q3 GDP
Our forecast for Q3 GDP is 0.7%qtr, 2.1%yr.

The risks to our forecast are materially to the upside, in the wake of the Business Indicators survey.

Hanlon notes that tomorrow “net exports and public demand data will be released” and that further revisions to GDP forecasts could be made.

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