Australia avoids recession as growth rebounds: Shane Oliver
GUEST OBSERVER:
Australian GDP rose by 1.1 percent in the December quarter 2016, following a 0.5 percent decline in the September quarter and beating market expectations (of a 0.8 percent rise).
Annual growth was running at 2.4 percent in December, which is below potential growth of around 2.75 percent. The key points from the GDP data are:
Much stronger-than-expected consumer spending growth of 0.9 percent quarter on quarter (contributing 0.5 percentage points to fourth quarter growth). The retail data showed a moderate contribution to spending from retail sales but the pick-up in household consumption was quite broad-based across services (recreation & culture, transport services, health services, rent).
The household savings ratio fell further to 5.2% in the December quarter, well down from around 9% in recent years. The wealth effect from the surge in dwelling prices has encouraged households to draw down on their savings in the face of weak income growth, but given already very frothy housing market conditions in Sydney and Melbourne it’s hard to see this trend extending for much longer. Basically wages growth will need to pick up or else consumer spending will slow back a touch;
A rebound in dwelling investment (contributing 0.1 percentage points to fourth quarter growth), as expected, given the positive pipeline of residential construction still to be completed. This positive trend from residential construction will continue in 2017, albeit at a slowing pace;
Better-than-expected private business investment (contributing 0.2 percentage points to fourth quarter growth). Non-residential building growth was stronger than forecast, engineering construction rose (despite partial indicators suggesting a fall) and machinery and equipment capital spending also improved. The quarterly capital expenditure survey showed that mining capex has further downside over the next year and non-mining capex growth will be subdued so business investment growth is still likely to be constrained; Public spending contributed 0.3 percentage points to fourth quarter growth because of a solid lift in investment (following a large fall in the prior quarter). State capex budgets show that government investment are likely to remain elevated for the medium-term; Inventories detracted 0.2 percentage points from growth, as expected; and Net exports contributed 0.2 percentage points to growth, also as expected, with both export and import_ volumes lifting in the December quarter.
Source: ABS, AMP Capital
IMPLICATIONS:
The overall sense from the GDP and the broader activity data is that the Australian economy remains in okay shape, but it’s hard to see a sharp further reacceleration of growth in the near-term. We see growth averaging around 2.5-3% in 2017. Mining investment will remain a drag on growth, housing investment is positive but slowing, net exports will be a positive driver of growth but consumer spending may still be constrained.
The big positive for Australia is in the sharp turnaround in nominal GDP - which is a measure of GDP that also allows for changes in prices. Nominal GDP was up by 3.0% in the December quarter and 6.1% over the year which is due to the surge in commodity prices recently. The upswing in nominal outcomes is also evident in the uplift in company earnings, observed in the just completed company reporting season.
The strength in nominal incomes will flow through to governments and businesses, but the flow back to households may be limited given the constrained Federal budget and uncertainty around how long commodity prices can remain elevated.
The turnaround in Australia’s nominal income story, better activity data, stability in the labour market and excessive strength in the Sydney and Melbourne housing markets means that it will be hard for the RBA to cut the cash rate again in the months ahead unless we see a further leg down in underlying inflation. As a result we are dropping our forecast for another rate cut in May. Our base case is now for rates to be on hold this year. That said if the RBA is to do anything on rates this year a cut is more likely than a hike given the downside risks on inflation. A rate hike is unlikely until later next year.
CoreLogic dwelling price data today showed that the momentum in Sydney and Melbourne housing markets is not slowing down, with Sydney dwelling prices up by 18.4% over the year and Melbourne 13.5% higher (see chart below). Housing affordability issues are now reaching a critical point in Australia and Australian governments should up their efforts around this issue – with the May Federal Budget providing a good opportunity.
Source: ABS, AMP Capital
SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.