The Forward View – Australia: June 2017

Business versus households – how will the situation resolve itself?

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Overview:

  • The Australian economy inched forward in the first quarter of 2017, eking out growth of 0.3% q/q. While this marked the 26th year of uninterrupted growth without a technical recession  – no mean feat – the year-ended rate of growth dropped to 1.7%, the weakest rate since the global financial crisis in 2009. Partly this owed to one-off (largely weather-related) hits to exports and construction. There will be further disruptions in Q2 given the 45% decline in coal exports in April thanks to Cyclone Debbie – our forecasts see net exports subtracting 0.5ppt from Q2 growth, taking GDP growth down to 0.2% q/q and 1.2% y/y.  Fundamentally we have not changed the tenor of our forecasts but have fine tuned some of the near term numbers.
  • Household income remains a constraint on growth, with average earnings flat in year-ended terms. While households are drawing down on their savings to fund spending (the savings rate dropped to 4.7%), spending on essentials (particularly services) remains the strongest component of consumption, suggesting the drop in savings may not be voluntary. In contrast, business conditions remain strong and business investment increased modestly in Q1, driven by a small rise in both non-mining and mining investment. While some further declines in mining investment are likely as LNG projects run off, the worst of the “mining cliff” appears, probably, to be behind us. In addition, it is possible that non-mining investment may soon accelerate in response to positive growth in non-mining profits and higher capacity utilisation.
  • How this apparent disconnect between a buoyant business sector and weaker household sector resolves itself will be critical to the economic outlook. For now, we envisage lacklustre growth in household consumption, and  a moderate cyclical upturn in non-mining investment, while government investment will help to fill some of the void left by mining investment. Real GDP growth will be supported in the second half of this year as LNG exports ramp up (with delays now suggesting the most strength in Q4), before softening to 2¼% y/y by mid-2018 – as LNG peaks and dwelling construction turns negative. For 2019 growth improves moderately to nearer 2.7% y/y – as non mining investment and public spending strengthen.
  • Official employment data have strengthened notably, reducing the divergence with survey measures. Leading indicators such as the NAB business survey employment index imply some downside risk to our  near-term forecasts for the unemployment rate to ease very gradually, with the participation rate a swing factor.
  • There is some evidence that housing prices may be  peaking, including in Sydney and Melbourne, with further response to macro-prudential measures likely as mortgage lenders limit interest only loans. This should help settle RBA concerns about household debt although rate hikes are a long way off amidst elevated unemployment and low wages and inflation.

For further details, please see the attached document.