Non-mining recovery gaining traction

• Variable economic growth outcomes continued into Q3, with real GDP picking up strongly to 0.9% q/q, following a revised weak 0.3% outcome in Q2 and a strong 0.9% increase in Q1. Year-ended growth picked up moderately to 2.5% y/y, but remained below trend.

• Looking through the quarterly oscillations, underlying momentum has been broadly unchanged – not a bad achievement given significant structural change as the economy adjusts to a sharply lower terms of trade and mining investment trajectory.

• Indeed, the detail was relatively encouraging and consistent with a gradual cyclical recovery across the non-mining economy. In particular, growth outcomes are broadening, consistent with business conditions reported in the NAB business survey. Industry data suggests services industries are benefiting the most, particularly ITC, real estate, finance & insurance, as well as health, public administration, while retail and hospitality are benefiting from a slightly less cautious consumer and net tourism inflows.

• Also noteworthy was the smaller-than-expected decline in business investment. While still substantive (-4.6% q/q), the decline was far less pronounced than indicated by last week’s capex figures, suggesting better outcomes for sectors such as education and health and/or stronger intangibles investment.

• Otherwise, the general themes on the expenditure side were as expected and in line with the broad trends we have been flagging. That is, the much anticipated (and ongoing) sharp decline in mining investment is being offset by strength in export volumes. Household consumption growth is running at just below-trend as the savings rate eases further and dwelling construction is contributing moderately to growth in line with the high level of dwelling approvals. Public investment declined in Q3 after spending was brought forward to Q2.

• The most disappointing aspect of today’s release were weak state final demand in NSW and Victoria.

• Overall, today’s data is consistent with our forecasts for a gradual economic recovery in 2016 and 2017, although a weaker outlook for commodity prices may prompt some moderate revisions (see next Tuesday’s Global & Australian Forecasts document).  Incoming information is also printing in line with the general thrust of the RBA’s forecasts, with GDP growth this quarter actually printing higher than its forecast in November. Global risks remain pronounced, and if anything have intensified in recent months given the slowdown in East Asia, while domestic data suggest  greater resilience in the domestic economy.

For more information please refer to the attached report.

• Australian Economic Update – Q3 GDP 2015 (PDF, 312KB)