Export driven growth, but further signs of rebalancing

• Today’s National Accounts revealed stronger real GDP growth of 1.1% in Q1 2016 (up from 0.7% in Q4 2015), above the market expectation of 0.8% but in line with our forecast – with the composition of growth very similar to what we were expecting. Year-ended growth also picked up to a solid 3.1% y/y.

• Growth was heavily driven by net exports (contributing 1.1 ppts in the quarter), offsetting another sharp decline in business investment – consistent with the shift to the production phase of the mining boom. Looking through these impacts, however, there are signs that a non-mining recovery is still gaining traction, especially in the services sectors. Household consumption made a strong contribution, rising 0.7% in Q1 despite a simultaneous rise in the household savings ratio (although the trend is down), supported by apparent strength in services consumption. Government spending and dwelling investment also made more modest contributions to growth.

• Favourable seasonal conditions saw mining outperforming the other industries although the strength in services was also apparent and is expected to continue. Industries including real estate services, ICT, public administration and finance & insurance again outperformed. The strength in agriculture was not consistent with production and exports data.

• By state, non-mining states continued to outperform, while the slowdown in mining regions was less pronounced. Subdued levels of private investment are also providing challenges for smaller states like SA and TAS, which showed minimal levels of growth.

• Income measures picked up reasonably strongly in Q1, especially against the context of a further fall in the terms of trade. Real gross domestic income and real net national disposable income were up 0.5% and 0.2% respectively, although the latter fell in per capita terms (-0.1%q/q). In contrast, the gross operating surplus of non-financial corporates fell notably, as the falling terms of trade and competitive pricing likely eroded profits. Wages measures were subdued, but higher than in the previous quarter, with average compensation of employees rising by 0.4% q/q (to be 1.2% higher over the year).

• Consistent with the weak Q1 CPI outcome, there were broad based price declines over the quarter. The GDP deflator was down 0.6%. The terms of trade continued to fall, down 1.9% in the March quarter to be 11.5% lower than a year ago, further weighing down on national income. The deflator and chain price index for household consumption both fell by 0.1%, consistent with the CPI decline.

• The RBA is likely to look through the strong Q1 GDP result given it was largely due to a lift in exports that is not expected to be sustained in the medium term. Additionally, the subdued Q1 CPI figure means the RBA will also be focused on the national accounts measures related to prices,including wages, unit labour costs, and the consumer price deflator – which were also subdued. At this stage, NAB expects the RBA to remain on hold for the remainder of 2016, though we do acknowledge a further rate cut remains a possibility if inflation continues to surprise to the low side. With activity indicators positive NAB does not expect any consideration of further easing before the next CPI release (released 27 July).

For more information please refer to the attached report:

• Australian Economic Update – Q1 GDP (PDF, 499kb)