Government spending drives Q2 GDP

• Today’s National Accounts revealed moderate real GDP growth of 0.5% q/q and 3.3% y/y in Q2, slightly below our and market expectations for a 0.6% q/q. Q1’s stellar growth rate was revised down slightly to 1.0% q/q from the originally reported 1.1% q/q. Year-ended growth picked up to 3.3% y/y from 3.0% y/y last quarter. This was the fastest pace of growth in year-ended terms since mid-2012, although growth is forecast to ease back below 3% as the year progresses.

• Government spending has certainly surprised on the upside, up 2.4% in underlying terms in the quarter and adding 0.5ppt to real GDP growth. This reflects stronger government investment (particularly at the state level, likely reflecting infrastructure spending) as well as government consumption (see within for further detail).

• Otherwise growth outcomes by expenditure category were mixed. Household consumption growth was weak at 0.4% q/q, down from 0.8% q/q in Q1. This is a trend which bears close watching and coincided with a softening in business conditions for retail trade in the same period. The household savings rate was steady in the quarter at 8.0% and slightly higher than the low of 7.5% in Q4 2015. New dwelling construction was higher again, although this was mostly concentrated in renovation activity rather than construction of new dwellings despite the strong pipeline of projects.  The contraction in mining investment has endured as a greater number of projects approach completion, although the offset from higher resource export volumes was smaller in Q2 and net exports subtracted 0.2ppt from growth despite stronger services exports.

• The recovery in the non-mining economy continued, although did lose some momentum in Q2 – our estimates of non-mining GDP increased by 0.7% in the quarter and eased slightly to 3.1% in year-ended terms from almost 4% y/y in Q1.  Strong production and exports saw mining outperforming again although the strength in services was also apparent and is expected to continue. Industries including professional services, wholesale, finance and real estate services outperformed in the quarter while agriculture, manufacturing and construction again lagged behind.

• All states enjoyed positive domestic demand growth in Q2, except for WA which struggled with falling business investment. Rising public spending and household consumption were able to offset falling private investment in most states, producing positive growth results.

• The terms of trade rose by 2.4% in Q2, and adding to income growth for the first time in approximately three years. This has supported measures of national income in the quarter, with real gross domestic income rising 0.9% q/q and real net national disposable income rising 0.2% q/q. Nominal GDP was even stronger at 1.3% q/q and 3.4% y/y.

• Labour productivity measures were generally stronger in the quarter, with GDP per hour worked rising by 1.2% q/q and market productivity at 1.5%, predominantly driven by a decline in aggregate hours worked in the quarter against a backdrop of relatively strong GDP outcome.

• Price indicators in the National Accounts were mixed in the quarter.  The GDP deflator – the broadest measure of inflation – rose 0.7% q/q. However measures of consumer prices were subdued overall to be consistent with the modest outcome seen in the Q2 CPI.

• In terms of labour income, the growth in total compensation of employees slowed to 0.5% in Q2, which is not surprising considering employment growth in Q2 was largely dominated by part-time jobs rather than full-time jobs. Average compensation of employees rose by an even more modest 0.2%  q/q, which is consistent with a still-soft outlook for wages growth.

• Monetary policy implications: Today’s figures are somewhat stronger than anticipated by the RBA in August and continue to suggest reasonable growth across the non-mining economy, despite some modest loss of momentum. That said, the influence these figures have on the outlook for the economy and monetary policy will depend on whether the support to growth from government spending continues. The RBA will also be watching indicators of household consumption closely given the slowdown in Q2. It is also important to note that growth in Q2 was not supported much by recent RBA cuts in May and August which will have more bearing on the remainder 2016 and 2017. We do not expect any near-term shift in monetary policy, but retain our view that two cuts will follow in mid-2017 in response to the ongoing weak inflation and risk that the economy slows too sharply in 2018 as the dwelling construction cycle ends and LNG exports flatten off.

For more information please refer to the attached report:

• Australian Economic Update – Q2 GDP (PDF, 620kb)

More from NAB:

• US Economic Update: September 2016
• Australian GDP Preview: Q2 2016
• NAB Business Research and Insights