Growth, but in fits and starts

• Variability in Australia’s growth outcomes by quarter indicates an economy undergoing significant structural change as it attempts to transition away from mining-investment led growth. Real GDP expanded by just 0.2% in Q2, following an unrevised solid 0.9% increase in Q1. Year-ended growth running at 2.0%, the slowest since Q3 2013.
• A number of one-offs in recent quarters however, suggest there has not been a fundamental shift in underlying momentum, and we are reluctant to extrapolate the weak Q2 outcome going forward. One-offs include the decline in dwelling construction (at a time of record approvals) and the large subtraction from exports (which is unlikely to reflect weaker demand from China, but more likely reflects some payback following a surprisingly strong Q1, as well as changed weather patterns). This should more than offset any reversal of the sharp increase in government investment in Q2.
• That said, the smaller-than-expected rise in household consumption does present a downside risk to our (and the RBA’s forecasts) which are reliant on renewed declines in the household savings ratio. Weakness in Q2 however is at odds with strength in retail sales in the quarter, as well as strong business conditions reported in retail and recreational & personal services.
• As well flagged, measures of income growth were particularly weak given the decline in the terms of trade, although nominal GDP remained in positive territory. This is flowing through to weak corporate profits as well as labour earnings.
• Meanwhile, there was some evidence that growth outcomes are broadening across the non-mining economy, outside of the dwelling sector. Lower interest rates and AUD are helping drive broader growth. Industry GVA data suggest service industries are benefiting most, particularly ITC and finance & insurance, as well as hospitality.
• Broadly speaking, there is little in today’s release to prompt a re-think of our (or the RBA’s) slow expected recovery in 2016/17, as lower imports and improvements in the non-mining sector, consumer spending and dwelling consumption help to offset business investment – although the starting point will be lower. The RBA was also expecting a quarterly outcome of between 0.1% and 0.4% q/q. We do acknowledge however that offshore risks stemming from financial market volatility and a slower China are pronounced. We (and the RBA) must wait for the dust to settle before assessing whether these represent a material change to the Australian outlook.

For more details, please refer to the attached document.

• Australian Economic Update – GDP Q2, 2015 (PDF, 120KB)