Reassuring growth

• Today’s GDP figures provide reassurance that the Australian economy remains resilient amidst an uncertain global backdrop and weak commodity prices. Real GDP expanded by 0.6% q/q in Q4 (Mkt: 0.4%, NAB: 0.6%), following growth of 1.1% q/q in Q3 (revised up from 0.9% q/q). Year-ended growth was 3.0%, the strongest rate since Q1 2014.
• The composition of the figures was particularly encouraging. Household consumption was strong at 0.8% q/q, and the household savings ratio dipped to 7.6%, the lowest since before the GFC. Also notable was the smaller-than-expected decline in business investment (-2.7% q/q in underlying terms). While mining investment continued to drag, machinery & equipment and non-residential building investment were positive. Together with higher government investment, this saw domestic demand expand 0.4% q/q. Net exports meanwhile disappointed, although the expected surge in LNG exports was apparent.
• Industry data suggests the recovery across the non-mining economy gathered steam in late 2015. Output in labour-intensive services industries such as real estate, IT, financial services, health, public administration and arts & recreation were strong, consistent with the NAB measure of business conditions and strong employment. Retail and wholesale trade output were also solid. Indeed, our estimate of non-mining GDP is now running at above its long-run average in year-ended terms.
• By state, NSW, Victoria and Tasmania continued to outperform, while the downturn in state final demand in WA and the NT was more pronounced. State final demand growth in SA ran behind its eastern neighbours, but ahead of Queensland.
• Income measures were largely unchanged in Q4, with real gross domestic income flat and real net national disposable income down 0.1% (-0.4%q/q on a per capita basis). While weak income growth is an ongoing challenge, these measures were surprisingly stable given the 3.2% decline in the terms of trade. In particular, corporate profits were positive in Q4, in keeping with strong employment and better-than-expected business investment in the quarter. The main area of weakness was wages, with average compensation of employees declining 0.6% q/q, reflecting the tilt towards lower-paid services jobs.
• Overall, today’s figures suggest the recovery across Australia’s non-mining economy remains on track despite considerable challenges. Strong output growth in Q3 and Q4 also gives more substance to the fast growth in employment in H2 2015. While the RBA remains alert to heightened global risks and retains a clear easing bias, resilience in the domestic economy suggests the bar for further easing is high. 

For more information please refer to the attached report:

• Australian Economic Update – Q4 GDP (PDF, 304kb)