The Australian economy July 2017

Australian economy: Q2 partials positive rebounding from weather disruptions.

A soft start to 2017 for Australia’s economy ..

The Australian economy has endured a bumpy ride of late. Output contracted in September quarter 2016, –0.4%, impacted by the July Federal election and weather disruptions. The economy roared back to life in December, +1.1%, with broad based strength. It was then a slow start to 2017, +0.3%, with weather disruptions again a factor, impacting housing, –0.3ppts, and resource exports, –0.5ppts. Annual GDP growth has dipped to 1.7%, moderating from 2.5% a year ago, the slowest pace since 2009 during the GFC. So, where to next?

... impacted by weather disruptions.

For the 2017 year as a whole we assess that the outlook is still relatively sound. Recent partial indicators lend support to our view that conditions will rebound from these temporary disruptions. Notably, retail sales have strengthened in Q2, exports have bounced back and there has been a turnaround in jobs momentum with a recent hiring burst. Real GDP for the year to December 2017 is forecast to grow in line with trend at 2.8%. In 2018, an unfolding downturn in home building activity and the associated negative spill-over effects on employment and household spending will weigh on growth. We continue to expect real GDP growth in the year to December 2018 to be 2.5%, a below trend performance.

Annual GDP growth dips to post GFC low of 1.7%.

As to key forces impacting the economy, a plus is that some earlier headwinds have passed or faded. The mining investment drag is moderating from a direct subtraction of –1.0ppt in 2016, to a forecast –0.5ppts in 2017, and –0.1ppts in 2018. Activity will be supported near term by: the strengthening of global growth; the still relatively low dollar, boosting exports; low interest rates; robust public demand, led by an upswing in investment; and solid population growth. However, some concerning structural headwinds persist, most notably weakness in wages growth, which is restraining consumer spending and in turn overall economic activity.

Partial indicators for Q2 have been positive ...

National income received a significant boost from the recent and likely temporary jump in commodity prices, which was in part due to supply disruptions and a speculative element. Nominal GDP growth accelerated to an above trend 7.7% in the year to March 2017, up from 1.8% a year earlier, the fastest pace since March 2011. The terms of trade rebounded 25% over the past year, after a 35% decline over the four years to end 2015. Businesses, particularly in the mining sector, have been the main beneficiaries. Importantly, as anticipated, there has been limited to no pass through to households in the form of stronger wage incomes. Commodity prices appear to have passed their peak as temporary, with the terms of trade likely to begin retreating again from the June quarter. We expect annual nominal GDP growth to moderate to 3.4% in December 2017 and then dip to 2.0% in December 2018.

... retail bounces back ...

In the labour market there have been some encouraging signs, with employment increasing by a brisk 2.9% annualised over the six months to May 2017, a sharp turnaround from a rise of only 0.2% annualised over the six months to September 2016. This shift in momentum brings the official jobs data into line with the Westpac Jobs index. Recall that during 2016, employment outcomes undershot fundamentals, in part as a correction to over hiring in 2015 and in part due to the disruptions associated with the July Federal election. Even so, there is still a deal of labour market slack, suggesting that wages growth will remain weak for some time yet.

... so too exports ...

Consumer spending bounced back in the December quarter 2016, up 1.0% in the period, only to stumble again in March, up a modest 0.5%. No doubt weather disruptions were a factor early in 2017, as evident from retail sales. The June quarter is off to a more positive start, with retail increasing by 1.0% in April and expanding by a further 0.6% in May. The recent strengthening in employment growth will also provide some support. However, weakness in wages growth and lacklustre consumer confidence will continue to cast a cloud over the near term outlook. For 2017, we expect consumer spending to increase by a below trend 2.8%, up from 2.3% currently.

... and there’s been a hiring burst ...

Public demand grew above trend in 2015, 4.6%, and in 2016, 4.1%, after four years of weakness, boosted by the upswing in investment. With a sizeable pipeline of public works overall public demand growth will be robust at around 3% in 2017 and 2018. As to business investment, there is an emerging stabilisation, as the mining downturn draws to an end, but an absence of strength at a time of lacklustre consumer spending. Business investment, which edged higher in Q4 and in Q1, the first back-to-back gains since 2012, is expected to trend broadly sideways in 2017 and 2018.

... but weak wages growth persists.

Export shipments declined in Q1 and were weak in April, in large part due to weather disruptions. With operations returning to normal in May, additional LNG capacity coming on stream, as well as the lower currency underpinning strength in service exports, up 7.6% over the past year, the outlook for the remainder of 2017 and in to 2018 is positive. Real net exports subtracted a chunky 0.7ppts from Q1 growth but are expected to be more neutral in Q2 and then to spike in Q3, making a sizeable positive contribution to growth.

Andrew Hanlan, Senior Economist

Reproduced from the July 2017 edition of Westpac market outlook. Business Focus will no longer reproduce this article. You can subscribe to Market Outlook and other economic publications on Westpac IQ and be notified when they are available.

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 may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.