Is the Australian economy bouncing back

Chief Economist, Matthew Peter 

The global economy is currently enjoying a synchronised recovery. Across the world, economic growth is improving, business confidence is at decade high levels, employment growth is strong and equity markets continue to climb. Recent national accounts data highlight the improvement, with real GDP reported to have risen 2.6% over the year to the September quarter in the OECD economies, up from just 1.6% this time last year. Will Australia follow this global trend, or will we lag behind?

Next week we’ll find out, with the Australian Bureau of Statistics scheduled to unveil our National Accounts on Wednesday. In our view, growth looks set to bounce back here too. We estimate real GDP rose 0.7% over the September quarter, helping push the year-ended growth rate up to 3.0% from 1.8% in the June quarter. While the rebound looks impressive at face value, the jump in year-ended growth is exaggerated by base effects after poor weather depressed economic activity in Q3 2016. Nonetheless, abstracting from these temporary factors, underlying real GDP growth is tracking around a 2¾% annual rate.   

Driving the improvement in the Australian economy has been a recovery in business investment. Real private new capital expenditure (capex) rose a further 1.0% in the September quarter and is now up 2.3% over the past year; this is the first-time annual capex growth has been positive in Australia since the mining investment downturn commenced in 2012. Diminishing headwinds from the mining sector are now clearly apparent, with mining capex flat over the September quarter. Perhaps, more importantly, are ongoing signs of recovery in non-mining sectors of the economy. Non-mining capex advanced 1.5% in the September quarter and is now up almost 9% over the past year. Promisingly, business capex intentions have also improved and suggest growth in non-mining capex will continue at this solid pace over 2017/18.

The other main driver of the Australian economy has been a ramp-up in public infrastructure spending. This trend has continued during the September quarter and we estimate that growth in new real public investment is up around 13% over the past year. The strength in public capital investment primarily reflects the roll-out of the NBN and the significant transport projects under construction in Sydney.

The recovering global economy and an ongoing ramp-up of LNG production has also contributed to solid growth in export volumes in the September quarter. We expect exports to rise a robust 3.3% in the September quarter, while imports are forecast to advance by 1.8%. With exports outstripping imports, net exports should add around 30 basis points to quarterly real GDP growth.    

However, the economy is not firing on all cylinders with the household sector continuing to lag behind. Retail sales volumes rose a weak 0.1% in the September quarter and, although we forecast slightly stronger spending on services, overall real household consumption is expected to increase by a sluggish 0.4% over the quarter. Households remain constrained by weak wage growth, although the recovery in employment is helping cushion aggregate income growth. Dwelling investment is also estimated to have peaked in late 2016 and we forecast a modest fall in the September quarter. Although the housing construction cycle has turned, recent dwelling approvals data suggest the downturn is likely to be felt more in late 2018 and 2019, rather than 2017.

Overall, next week’s National Accounts should reveal an ongoing gradual improvement in the Australian economy, particularly outside the household sector. However, while annual real GDP growth in Australia is likely to outstrip that of the OECD aggregate, it is misleading to conclude that our economy is performing better. Rather, on a per person basis, growth in the Australian economy is lagging behind our advanced economy counterparts. Or more technically, the Australian economy is expected to grow in line with estimates of potential growth, whereas most other OECD economies are experiencing above-trend economic growth.

Looking further ahead, we expect the recent momentum in the global and Australian economies to be sustained. Real GDP growth in the OECD should average around a 2¼ to 2½% pace in 2018, while growth in Australia is forecast to advance 2.7%. While the economic recovery underway, both domestically and globally, will be viewed favourably by the RBA, ongoing headwinds for the consumer and a benign inflationary environment will ensure that any move towards tighter monetary policy remains some way off. As such, we continue to expect the RBA will keep rates on-hold until Q3 2018. The economy may well be bouncing back, but just not high enough to prompt any near-term change in policy.

 

Table 1: Financial market movements, 23 – 30 November 2017

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,647.6

1.9%

US

2.41%

9.1 bps

US Dollar Index (DXY)

93.05

-0.2%

Nikkei 225

22,725.0

0.9%

Japan

0.04%

1.4 bps

USD-JPY

112.54

1.2%

FTSE 100

7,326.7

-1.2%

UK

1.33%

8.1 bps

GBP-USD

1.353

1.6%

DAX

13,024.0

0.1%

Germany

0.37%

2.0 bps

EUR-USD

1.190

0.4%

S&P/ASX 200

5,969.9

-0.3%

Australia

2.50%

-0.9 bps

AUD-USD

0.757

-0.8%

Source: Bloomberg

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