September 2, 2016

Australian GDP Preview: Q2 2016

Q2 GDP growth expected to ease to 0.3% in the quarter (down from 1.1%)

Key points:

Q2 GDP data will be released on Wednesday 7 September at 11:30 AEDT. Additional partials will be available next week prior to the GDP release.

  • Q2 GDP growth expected to ease to 0.3% in the quarter (down from 1.1%), based on economic partials, largely due to a smaller contribution from net exports. Year-ended growth is expected to be steady at a solid 3.1% y/y – above our estimate of Australia’s potential (2.5%[1]) in large part due to base effects from prior large net export contributions (reflecting increased commodity production/exports)
  • The contraction from mining investment has continued as more major mining projects approach completion, although the offset from stronger export volumes was smaller this quarter. New dwelling construction was positive, albeit surprisingly soft, but renovation activity is expect to provide support. A solid labour market and demand for services is expected to keep household consumption growth solid – but will likely require another fall in the household savings rate given subdued income growth.
  • Evidence of an ongoing recovery in the non-mining economy is expected in the industry gross value added figures, although the pace of recovery may have slowed. The NAB Business Survey suggests demand for household services (including health), and business services remains solid. However, lower than expected construction of new dwellings may suggest less of an offset to weak non-residential investment for the construction industry, while retail activity looks to have lost more momentum. By state, domestic final demand is expected to have outperformed in NSW and Victoria, while WA will continue to feel pressure.
  • The terms of trade are expected to rise 2.4%, which is the first increase in more than 2 years and will assist measures of national income – although it is still down 5.6% over the year.
  • GDP growth will be more subdued, but a fall in hours worked (consistent with the rise in part-time employment) suggests an improvement in productivity in Q2. Beyond the near-term, however, productivity growth is expected to remain muted.
  • Our forecasts are broadly consistent with those in the RBA’s latest Statement on Monetary Policy, so are unlikely to have a material impact on the Bank’s views. However, the RBA will be monitoring indicators of the inflation outlook, including average labour earnings and unit labour costs – the former is expected to grow modestly in Q2, while unit labour costs may decline again owing to better productivity.

For further details, please see the attached document.

[1] For NAB’s latest estimates of Australia’s potential growth rate, please see: Australia’s Changing Growth Potential – 26 May 2016