A further slowing in growth
After (unrevised) growth of 1.1% in the March quarter, growth of 0.5% in Q2 with the known 0.9% drag from net exports was a more than respectable outcome. Headline growth was a tad above the 0.4% consensus and our own 0.2% call.
After (unrevised) growth of 1.1% in the March quarter, growth of 0.5% in Q2 with the known 0.9% drag from net exports was a more than respectable outcome. Headline growth was a tad above the 0.4% consensus and our own 0.2% call. It would be a relief for the RBA, with annual growth of 3.1% virtually right on their 3% forecast published in the August Statement on Monetary Policy.
There has also been some improvement in the near term outlook for growth with a better start to Q3 appearing from what we’ve seen from the likes of business and consumer confidence, hints of better consumer spending and a solid pipeline of dwelling investment activity ahead.
The complexion of the growth story in Q2 looks to have been as expected. That is, sluggish (but thankfully not negative) household consumption of 0.5%, flat underlying business investment, good growth of 3.2% in dwelling investment spending, the sizeable 0.9% net exports drag offset by higher non-farm inventories.
On the consumer side, despite the 0.2% decline in retail trade volumes, most categories of household consumption rose in the quarter and the household savings ratio at 9.4% has hardly budged this past year. High consumer spending came despite tepid growth in incomes, with average non-farm compensation per employee growing just 0.3% in Q2, up 2.4% over the course of 2014/15. Wages growth has been softening incrementally but labour demand indicators suggest some modest pick-up in employment growth which together should see some continued, if unspectacular, contribution to growth from consumption.
Underlying business investment was virtually flat in Q2 (-0.3%), down 4.4% over the four quarters both from defensive confidence and focus on managing cash flows efficiently, rather than an expansive mood. Resource investment has also been wound back with more declined to come. Domestically-based investment is showing signs of recovering somewhat based on our own NAB Business Survey and the Statistician’s Q2 Capex survey.
Unit labour costs are flat over the past year, capping wages as a source of inflation.
One sector that has increased its contribution to growth is dwelling investment that rose 3.2%/9.5%, contributing 0.4% points to growth this past year. The build pipeline remains strong and we look for a solid contribution through this current half and into 2015.
On the income side of the national accounts, something more akin to the economy’s cash flow, the terms of trade decline has seen no growth in nominal GDP in Q2 and growth of 3.3% over the course of 2013/14, no faster than the real economy. This is the slowest growth in nominal GDP since the GFC and before then the early 1990’s recession. Further prospective declines in the terms of trade through this half based on the decay of the bulk resource commodity price will continue to restrict growth in incomes and ultimately act as some growth retardant for households, business and government.
For now, growth in the economy in the second quarter has been marginally above consensus expectations and certainly above low to negative growth fears, including our own. Coupled with signs of improvement in high frequency indicators in the past month or two, today’s result and subsequent press coverage should help to bolster confidence levels.
Certainly the absence of any negative growth headlines is a plus, buying more time for the RBA to remain on hold as it monitors the still not yet secured transition toward more purposeful domestic demand and employment growth.
We retain our baseline view that the cash rate will remain unchanged well into 2015, with the next move by then more likely to be an increase.
We will be reviewing out medium term forecasts for the economy in the light of today’s outcomes, but bearing in mind the similar themes evident relative to our expectations, changes to forecasts based on our earlier 0.4% model forecast for Q2 are unlikely to be material.
That forecast outlook pointed to growth of 3-3¼% growth for this calendar year and next with approximately two thirds of the growth from net exports and one third from the domestic economy.
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