Key points:

• Economic partials for Q1 GDP stronger real GDP growth of 0.8% in the quarter (up from 0.6% in Q4 2015). Year-ended growth is expected to ease marginally but remain solid at  2.8% y/y – this is above our estimates of Australia’s potential rate of growth of 2.5%[1] thanks to a strong contribution from commodity production/exports, but below the pre-GFC average of around 3¼% y/y.
• The pattern of growth will be consistent with the ongoing sharp decline in mining investment, with offsetting strength in export volumes. Dwelling investment will make a positive contribution, while household consumption will be solid, partly thanks to a further decline in the household savings ratio and apparent strength in services consumption.
• Industry gross value added figures are likely to demonstrate that the recovery in the non-mining economy, particularly in services sectors, continues to gain traction. As signalled by business conditions data from the NAB Business Survey, we expect further strength in household services (including health), business services, and sectors benefiting from tourism flows. Strong residential housing activity will also be supporting the construction industry, while retail activity looks to have lost some momentum. By state, domestic final demand is expected to have outperformed in NSW and Victoria, while the divergence between these states and a struggling WA will have intensified.
• The terms of trade are expected to fall a further 1.8%, to be 10.9% lower over the year, which will continue to weigh on measures of national income.
• We will also be watching productivity estimates closely. While productivity is likely to pick up amidst strong production/exports and subdued employment growth in the quarter, this effect will not be sustained into the medium term as the export surge runs its course, revealing a weaker medium-term outlook for productivity and potential growth.
• Our forecasts are broadly consistent with those in the RBA’s latest Statement on Monetary Policy. However the RBA will also be sensitive to indicators of the inflation outlook such as the average labour earnings and unit labour costs which were particularly weak in Q4 – the former is expected to grow modestly in Q1, while unit labour costs may decline again owing to strong productivity.

For further information please refer to the attached report:

• Australia GDP Preview – Q4 2015 (PDF, 293 KB)