Australia GDP Preview: Q2 2017

Q2 GDP data will be released on Wednesday 6 September at 11:30am AEST. Additional partials will be available tomorrow and may alter our forecast.

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Overview:

  • Economic partials point to reasonable GDP growth in Q2 of 0.6% q/q. This follows a particularly weak Q1 in which exports and construction were affected by weather events, although growth this quarter has also been affected by the impact of Cyclone Debbie on coal exports in particular (although surging LNG exports have masked this to some extent). As a result of disruptions this year and in Q3 last year, the year-ended growth rate actually drops further to 1.6% y/y, the weakest rate since Q3 2009.
  • Headline figures will thus not give an accurate picture of underlying growth momentum in the economy. Looking beneath the aggregate, there are likely to be some positive signals to take note of. In particular, private business investment looks to have increased for the second consecutive quarter, with a further apparent strengthening in non-mining investment particularly encouraging (particularly in machinery & equipment this quarter). (Note that we are not forecasting as strong a surge in mining investment as evident in Wednesday’s construction work done figures from the import of the Icthys central processing facility given the methodology in the national accounts which spreads projects over multiple quarters by including progress payments). Meanwhile, government investment looks to have increased strongly, as infrastructure programs continue to ramp up.
  • Stronger employment growth this year also appears to have supported strong consumer spending in Q2, particularly retail volumes. However this may prove to have been temporary, as there was a notable slowing in retail trade in the last month of the quarter, and leading indicators including the NAB cashless retail indicator suggest further slowing in July, while  consumer confidence has taken a beating amidst higher energy prices and geopolitical risk and retail conditions in the NAB business survey have fallen back. It appears that some of the strength in retail sales was unexpected this quarter, with wholesale stocks falling sharply and likely subtracting from growth.
  • More problematic this quarter was the poor performance  of dwelling construction, which is likely to have been broadly flat in the quarter following a sharp (4.4%) fall in Q1. This raises the possibility that dwelling construction has already peaked, as opposed to peaking sometime in 2018 as most had forecast. While this likely suggests a more elongated cycle with dwelling construction likely to hold at a high level for some time (and there is some evidence of rotation towards non-dwelling construction), an earlier drop back in housing construction would signal downside risks to the broader economy and employment given strong multipliers.
  • Net exports meanwhile look to have been neutral to growth. Despite the impact of Cyclone Debbie on coal exports early in the quarter, the rebound in May was stronger than expected, while there was a surge in LNG exports in the quarter. Import growth also remained solid, with capital imports particularly strong in Q2.
  • Income growth is likely to be mixed in Q2 with the ~5% drop in the terms of trade (as iron ore prices dropped back after the surge in Q1) weighing on corporate profits, but labour income supported by higher employment. Compensation of employees however is likely to have been stronger given the pace of employment growth in the quarter (even if wages growth remained low), and an improvement in the wages share of income is likely after it hit an 8-year low of 51.5% last quarter.

For further details, please see the attached document.