The economy looks to have performed solidly in Q1, following the weaker than expected outcome in the previous quarter. We expect growth across both the household and business sectors, with consumption growth making a significant contribution in addition to business investment, where the handover to the non-mining sector is set to continue. However, the contribution from consumption growth is likely to be short lived as it faces a number of headwinds such as the weakness in wages. Evidence of labour market tightening and a pick-up in wage growth (as well as inflation more generally) remains key to the outlook for monetary policy.
- Next Wednesday’s GDP figures are forecast to show the economy growing at reasonable rate of 0.8% q/q and 2.7% y/y. This suggests a pick-up in growth from the subdued outcome in Q4 which was driven by weak net exports and private investment.
- The quarterly outcome will be driven by domestic demand and overall the data will continue to paint a picture of an economy where infrastructure spending is supporting growth and momentum in non-mining business investment continues to build, along with some support from consumption in recent quarters. Household consumption is likely to record another solid outcome in the quarter, though we think this is likely to be short lived/overstate the underlying pace of growth as consumers remain cautious in the face of higher electricity prices, low wages growth, stalling growth in housing wealth and high debt levels. The NAB Cashless Retail Sales indicator also suggests a soft start to the June quarter for consumer spending. A small fall in dwelling investment is expected as the turn in the construction cycle continues. Net exports look to have made a small 0.2ppt contribution to growth, after a large subtraction in the previous quarter.
- The NAB Business Survey continues to suggest more balanced outcomes across states with business conditions holding at above average levels in all states, albeit with WA having only improved recently. It is likely that broad-based growth across industries will become increasingly evident based on industry patterns in the survey.
- While inflation and wages measures in the data will be watched closely, we do not anticipate any significant signs of a pick-up in wage inflation. The volatile national accounts measure of average earnings will likely remain subdued, in line with wage growth as measured by the WPI.
- The uncertainty around our forecasts is largely centred on consumption, which despite facing a number of headwinds recorded a strong outcome in Q4 2017.
- Monetary policy implications: The bounce back in growth will see the economy moving closer towards the RBA’s current forecasts for the year. Any extra information that can be gleaned from the national accounts measures of wages and inflation will likely be a focus following the continued weakness in the WPI in March. NAB Economics released a Change of RBA View note in May, suggesting that with the unemployment rate having held at around 5½% since August last year and little further evidence in the data of a significant pick-up in wage growth to date, it is unlikely that wage growth will reach a rate consistent with inflation around the mid-point of the RBA’s target in 2018. However, with growth continuing to rise over 2018 we expect a decline in the unemployment rate, and wage growth to accelerate to around 2½% by mid next year, giving the RBA confidence that inflation will move back towards the target band so that it can begin the gradual process of lifting rates from the current low levels. This is expected around the middle of next year.
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