The Australian Economy; heading in the right direction?

Economist's View


The global economy continues to experience a broad-based upswing, with most major economies finishing 2017 with strong momentum and the outlook for 2018 brightening further. Next week we’ll get a better picture of how Australia’s performance compared, when the Australian Bureau of Statistics (ABS) releases the 2017 Q4 national accounts data. While the course of 2017 saw a broad improvement in Australia’s economy, it was not without its fair share of headwinds, and both of these trends are likely to have continued into the final quarter of the year. But the positives are certainly outweighing the negatives, and the December quarter data is likely to show an economy that is on the right track and continuing its gradual improvement towards trend growth. We estimate real GDP rose 0.6% in the December quarter, matching the previous quarter’s outturn.

A key feature of Australia’s economic performance in 2017 was a long-awaited turnaround in non-mining business investment, and this is likely to have continued into the final quarter. Private non-mining capex grew both in the quarter and over the year in 2017 Q4 according to the ABS. Manufacturing capex grew 2.6% in the quarter while services capex expanded by 1.7% on strength in building and structures, and both non-mining categories were over 10% higher than the same quarter a year earlier. This is consistent with the continued strength in surveys of business conditions and business confidence. Mining capex fell by 4.7% in Q4 however, dragging total quarterly capex down to a weaker-than-expected 0.2% decline. Despite the quarterly fall, we expect private business investment to lift 1.1% in the December quarter due to strong gains in non-residential building construction. Promisingly, estimates of 2017/18 and 2018/19 capital expenditure suggest the recovery in non-mining investment should continue over the next eighteen months.

Another bright spot in the Australian economy has been employment growth, with the labour market adding 105.6k jobs in the December quarter to cap off a strong year where employment growth totalled 403,000 jobs. Strong employment growth is likely to have supported consumption in Q4 despite persistently weak wage growth. Promisingly, retail sales data for the December quarter showed a pick-up in retail sales volumes, which advanced 0.9% in the quarter compared to a 0.1% gain in the September quarter. As a result, we expect household consumption to grow by 0.7% in the December quarter, up from 0.4% growth in Q3. However, with wage growth only expected to recover gradually and house prices now falling on average, consumers are unlikely to continue raising consumption spending meaningfully in the near term.

Dwelling investment contracted for the third straight quarter in September as the surge in housing construction unwinds, and we expect this decline to continue into the December quarter. While approvals and commencements are below their 2016 highs, they have remained more resilient than expected, and there is still an elevated amount of work still in the pipeline, so we expect the fall in dwelling investment to only weigh modestly on growth in 2017 Q4.

Continued robust public infrastructure spending has helped support employment and smooth the drop off in dwelling and mining investment, and we expect this trend to continue into the December quarter. We estimate public investment will grow 2% in the December quarter, on the back of continued spending on large-scale government infrastructure projects.

Trade data for the December quarter suggests that net exports is likely to subtract a larger-than-expected amount from real GDP growth. Imports are likely to have continued growing in Q4 in line with improving domestic demand. Exports disappointed in the quarter however, with coal exports hit by supply constraints and rural exports also weakening notably. This is corroborated by the quarterly balance of payments measure of the trade balance reported by the ABS, which flipped from a $1.9b trade surplus in Q3 to a $0.6b deficit in Q4. We don’t expect much change in the terms of trade from the September to the December quarter, with most of the export weakness coming from softer volumes, and therefore flowing through to an expected -0.6ppt net export subtraction from real GDP growth.  However, a build-up in stocks could cushion some of the blow.

Overall, next week’s National Accounts should paint a particularly positive light for domestic demand, and while consumption may face further headwinds in 2018, the good news story of positive investment growth is likely to continue. With global economic momentum remaining strong through 2018, Australia’s net exports are likely to benefit from greater external demand, putting Australia’s economy on a steady path towards trend growth.

Table 1: Financial market movements, 22 February – 1 March 2018

Equity index



10-yr government bond



Foreign exchange



S&P 500





-11.3 bps

US Dollar Index (DXY)



Nikkei 225





-1.3 bps




FTSE 100





-7.9 bps









-6.2 bps




S&P/ASX 200





-11.8 bps




Source: Bloomberg


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