Key points:

Bottom line: GDP Growth rebounded in Q1, supported by the household and government sectors and export growth. While household consumption was weaker than we anticipated, this outcome followed a strong Q4, and is more in line with our assessment of the underlying pace of the growth in household spending. Public infrastructure investment and non-mining business investment in machinery and equipment also appear to be supporting growth. This release doesn’t change our view that growth will lift in 2018, in part due to a ramp up of LNG exports. The Q1 outcome will provide some comfort to the RBA that the underlying pace of growth is improving in line with its forecasts for this year, but wage and price data will remain the key variables for monetary policy in 2018. Wage and income data from this release, while showing some improvement, do not change our assessment that the RBA will remain on hold until mid-2019.

• Australian GDP growth was in line with our expectations following the recent partial data. Growth rose to 1.0% q/q in real terms (Mkt: 0.9% q/q). The year-ended rate of growth rose to 3.1% y/y.
• Household consumption growth weakened in the quarter (+0.3% q/q) after recording a strong outcome in Q1. While the quarterly outcome was weaker than we expected, it is more in line with our assessment of the underlying rate of growth in household spending. The significant headwinds faced by the household sector – weak wage growth, cooling house prices and high debt levels – continue, and are likely to weigh on consumption in 2018.
• Investment continues to paint a picture of a handover to the non-mining sector – albeit with some volatility. In underlying terms (excluding transfers) business investment recorded meek growth of 0.1% q/q. However, investment in machinery & equipment (largely the non-mining sector) rose 1.0% to be around 9% higher over the year. Engineering construction (often affected by lumpy LNG investment) also rose slightly in the quarter, suggesting a waning impact from the pull-back in mining investment as the bulk of large LNG projects enter the production phase. Buildings & structures investment weighed on investment growth in the quarter but remains higher over the year.
• Government investment (in underlying terms) rose in the quarter after declining in Q1. Investment in public infrastructure projects is likely to be a key source of growth going forward, where we expect the government sector to support domestic demand much the same way as it did this quarter.
• We believe this release will give comfort to the RBA, bringing the year-ended rate of growth in line with its latest forecasts for 2017/18. While growth appears relatively healthy, the weakness in household consumption is likely to remain a concern. Nonetheless, while this release does not change our view on the path of monetary policy (first increase mid-2019), there was some tentative evidence of a pick-up in wages growth, with average earnings growth rising to 0.5% in the quarter (and a small upward revision to the previous quarter). Combined with continued strength in employment, compensation of employees as a whole continues to grow at a relatively strong rate – a positive for wage earners as a whole.

For further details, please see the attached document:

• Australian Economic Update: Q1 GDP 2018 (PDF, 180kb)