The Forward View – Australia: June 2018

Economy off to a strong start early in 2018

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  • The economy got off to a bright start in early 2018, with Q1 GDP growth of 1.0% q/q, consistent with our view that growth would regain momentum this year.  Indeed, while we had been expecting annual, through the year, GDP growth to hit the 3% mark sometime in 2018, that benchmark has already been achieved (3.1% y/y in Q1).  Part of the strength in Q1 related to a build up of stocks, but around half related to stronger exports. That said, over the last six months, the growth rate was around 1.5% (or around 0.75% per quarter).
  • The details of Q1 GDP were largely in line with our view of  the factors likely to drive, and constrain, growth over the rest of the year. Increased infrastructure spending by governments and a ramping up in LNG exports were evident in Q1 and likely to persist over 2018 and into 2019. Underlying business investment growth was only marginal in Q1, but the environment remains conducive to further growth (rising profits and spill overs from public infrastructure programs). At the same time, consumption growth was soft, as consumers remain cautious in the face of higher electricity prices, low wages growth, stalling house price wealth and high debt levels. All up, we expect GDP growth of 2.9% in 2018.
  • We see many of the same factors still at play in 2019. We had previously expected the ramp-up in LNG exports to peak by end-2018 but now expect the peak to be reached in mid-2019. As a result, GDP growth in 2019 is expected to be similar to that in 2018. In 2020, with LNG not contributing to growth, GDP growth is expected to moderate to 2.7% despite support coming from a strengthening in domestic demand as higher wages growth feeds into stronger consumption. NAB’ s Monthly Business Survey continues to report business conditions at very high levels (+17 on a trend basis  vis-à-vis a long run average of +5.5). The Business Survey also continues to point to an strong employment growth – of around 20k/month for the next 6 months.
  • As a result we expect the unemployment rate – which has hovered around 5.5% for the best part of a year – to decline gradually over time. A tighter labour market should eventually lead to a modest improvement in private sector wages growth.
  • However, given the absence of any recent progress on the wages/unemployment front to-date, we recently removed our call for a RBA rate hike later this year. An environment of above trend growth, declining unemployment and (down the track) higher wages growth is consistent with the RBA eventually withdrawing emergency low monetary policy settings. We have pencilled in a rate hike in mid-2019, but the timing of any move by the RBA remains highly data dependent.

 

 For further details, please see the attached document: