The Australian economy June 2016

Q1 GDP +3.1%yr ...

The Australian economy’s output performance, in aggregate, has been resilient, in what remains a challenging environment. Real GDP grew by a better than expected 3.1% over the year to March 2016, with exports jumping 4.4% in the March quarter. That outcome is a little above trend, which is judged to be 2.75%. Westpac Economics is forecasting annual real GDP growth of 3.0% for December 2016, rounded up from 2.8% to reflect the stronger starting position. We continue to expect 3.0%yr for December 2017.

... better than expected but still uneven ...

Conditions across the economy remain uneven. The mining investment downturn, which is at its most intense currently, is a major headwind. The transition to strength across the broader economy remains a work in progress. Lower interest rates and a lower dollar are boosting housing and service exports, but non-mining investment remains sluggish. Downside risks remain, with forecast world growth for 2016 a sluggish 3.3%. There are domestic uncertainties as well, with a Federal Election on July 2 that could see businesses delay hiring and investment decisions awaiting greater policy certainty.

... incomes weak but set to improve.

In contrast to robust output, national income growth is weak as the rest of the world pays considerably less for the nations’ exports. Notably, the terms of trade is now 36% below its 2011 peak. However, recently commodity prices have bounced from historic lows, as producers adjust to lower margins. We see this as a harbinger of an emerging stabilisation in the terms of trade, forecasting a fall of only 5% for 2016 and a flat 2017. This would see nominal GDP growth improve from 2.1% in 2015 to a still weak 2.7% in 2016 and 4.8% in 2017, although that is still below the long-run average of 5.6%, constrained by the general disinflationary forces evident across the globe.

Job gains resume ...

In 2015, the labour market upturn was evidence that Australia’s economic expansion is being supported by low interest rates and a sharply lower Australian dollar. With activity becoming more job friendly, employment growth accelerated from 1.0% in 2014 to 2.7% in 2015, a pace well in excess of working age population growth of 1.5%. It came as no surprise that the jobs surge of 2015 gave way to a consolidation in early 2016. The consolidation appears to have been short-lived, with employment resuming its upward trend. For 2016, we expect jobs growth to moderate to around 2.0%, in part due to a loss of momentum in home building activity, and the unemployment rate to edge lower to 5.6%, from 5.8% at the end of 2015.

... and spending looks better supported ...

Consumer spending has gained a little momentum over the past year, with annual growth lifting to a solid but not strong 3.0%, up from 2.7% in mid-2015. We expect growth to hold at 3.0% in 2016 and then lift to 3.2% in 2017 as incomes improve. Across the nation, trends are quite divergent. Strength is apparent in the south-east, which is benefitting most from lower rates and a lower dollar, most notably in NSW, where per capita spending is a brisk 2.5%yr. Encouragingly, the recent lift in consumer spending nationally has been largely funded by wage incomes. Annual real wage incomes growth accelerated to 2.4% in March, up from only 0.4% a year earlier, as job creation and weak inflation more than offset sluggish nominal wages.

... but housing near a peak.

The established housing sector cooled late in 2015 and into 2016 following a strong response to earlier interest rate declines. In part this was due to a tightening of lending standards and a lift in mortgage rates. Now, with the RBA lowering rates in May 2016, and an expected follow-up in August, the housing market is likely to regain momentum, although the impact is likely to be modest. In 2015, home building activity grew by 10%, adding 0.5ppts to activity. In 2016, with the cycle nearing its peak, the contribution to growth is forecast to moderate to 0.2ppts, before turning in to a slight negative, -0.1ppt in 2017.

Exports positive ...

Exports, which grew by 4.4%qtr, 6.6%yr in March, are a key growth engine and will continue to be so, directly adding 1.5ppts to activity over the past year. The mining investment boom is paying dividends, with resource exports, +6.6%yr, adding 0.9ppts to activity. Also, the currency at US75¢, 20% lower than in mid-2014, is a game changer. The move has significantly improved the competitiveness of exporters and import-competing firms. Services exports, tourism, education and business generally, surged 14% over the year, the strongest result in twenty years, adding 0.5ppts to annual activity.

... business investment negative ...

Business investment is the ongoing weak spot and represents a downside risk to our central case forecasts, in part because of the additional uncertainty likely to surround the Federal Election. Mining investment contracted by 34% in 2015, subtracting 1.8ppts from activity; and a further 33% fall, a -1.2ppt impact, is expected in 2016 as major gas projects are completed. Non-mining investment, which fell 1% in 2015, undershooting household demand strength, is also forecast to edge 1% lower in 2016, before grinding 3% higher in 2017 in response to reductions in spare capacity.

... and public demand about ‘neutral’.

In closing, public demand, accounting for 20% of the economy, is no longer the headwind nationally that it was. A near 2% contraction in 2014, as governments focused on budget repair, gave way to a 3.8% rebound in 2015, with a forecast 2.6% rise for 2016. The public sector is hiring again, to meet the needs of additional frontline services in key areas such as health. Moreover, public investment is beginning to trend higher, led by much needed transport infrastructure projects in NSW and Victoria.

Andrew Hanlan, Senior Economist

Reproduced from the June 2016 edition of Westpac market outlook

Business focus also has the following articles from the June 2016 edition of Westpac's Market Outlook;

Australian interest rates June 2016

Australian dollar June 2016

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts June be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved June differ substantially from these forecasts.

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