June 6, 2018 / 1:59 AM / 6 months ago

Australian economy enters 27th year of recession-free growth

SYDNEY (Reuters) - Australia’s economy entered its 27th year without a recession in the first quarter thanks to bumper exports and a jump in business investment, although uncertainty over the outlook for household consumption remains a worry.

FILE PHOTO: Streaks of light from arriving ferries illuminate wharves at Sydney's Circular Quay terminal in this seven-minute-long time exposure at dusk, July 16, 2015. REUTERS/Jason Reed/File Photo

The local dollar AUD=D4 rose about a quarter of a U.S. cent after the Australian Bureau of Statistics reported gross domestic product (GDP) rose 1.0 percent in the first quarter.

That topped market forecasts of a 0.9 pct gain over the December quarter.

KEY POINTS:

*Q1 real gross domestic product +1.0 percent qtr/qtr,

seasonally adjusted (Reuters poll +0.9 pct)

*Q1 GDP 3.1 pct vs year earlier (poll +2.8 pct)

*Q1 final consumption expenditure +0.6 pct q/q

*Q1 gross fixed capital expenditure +0.5 pct q/q

*Q1 chain price index +1.1 pct q/q

*Q4 GDP was revised to +0.5 pct q/q from +0.4 pct

COMMENTARY:

MICHAEL BLYTHE, CHIEF ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY

“The economy got off to a good start in 2018, (with) very solid bottom line growth now running above the potential for the first time since about 2016. The growth pace is clearly going to be strong enough to keep some downward pressure on the unemployment rate over time.

“I think it fits with the idea that the next (rate) move is up but based on these numbers, we don’t seem to be generating much in the way of inflation pressures just yet. That first move is still some way off, we have it pencilled in for Q1 next year.

“We may not stay at the 3 percent plus type numbers but our reasonable period of trend type growth is looking in prospect.”

PAUL DALES, CHIEF ECONOMIST, CAPITAL ECONOMICS, SYDNEY

“The 1.0 percent q/q rise in GDP in Q1 suggests that the economy started the year on a strong note. But we suspect that may be as good as it gets, especially if the Royal Commission leads to slower credit growth. As such, we doubt the RBA will hike interest rates before late 2019.

“We doubt that the strength of net exports will be sustained as there was an element of catch-up after production problems in Q2 and Q3. But we fear that still subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.

“The good start to the year means the risks to our 2.5 percent 2018 forecast now lie on the upside. But the RBA’s 3.0 percent forecast is far from guaranteed.”

SU-LIN ONG, SENIOR ECONOMIST, RBC CAPITAL MARKETS:

“Whichever way you cut it, the economy has started the year well - growth fairly broad-based outside of household consumption.

“Household consumption pretty weak at 0.3 after a pretty strong Q4, and that’s even with a rundown in savings and fairly decent household compensation in the quarter, and even with that, it was a pretty lacklustre quarter for expenditure. That’s the component of growth to watch going forward.

“We don’t expect growth to maintain this 1 percent quarterly growth rate. We think that households face a number of headwinds. You can already see that. And with an unfolding moderation in the dwellings sector as well, that’s an added challenge for households. So, I don’t think this momentum continues. But having said that, it’s a good start to the year.

“I’d imagine the RBA would be pretty pleased with these numbers. They could be a tad above what they were forecasting, but I don’t think it’ll change their medium-term forecasts of return to a sustained 3 percent-plus-type growth.”

HENRY ST JOHN, ECONOMIST, JP MORGAN

“Certainly a little bit better than what the market was expecting...in terms of the composition of the strength it was a balance between net exports...and business spending was also a little bit stronger than we were expecting.

“The other main takeaway for us is underlying trending consumption is still quite weak. Part of our view going forward is that that’s going to be something that’s going to continue to trail off.

“I don’t think it will be sustained at this level. The annual GDP growth now if you’re looking at year-on-year is 3.1 percent....I don’t think that gets sustained going forward.

“The headwinds that the Australian consumer is facing both from a perspective of slowing housing market turnover...as well as just the drag on very high levels of household debt, going forward that’s just a structural drag on consumption. It’s going to persist for quite some time.”

JANE CHAN, SENIOR ECONOMIST, ST GEORGE BANK, SYDNEY

“There weren’t too many surprises in the quarterly data, although household spending was a little weaker than expected. The strength has really come from a turnaround in exports.

“I think we need to take the strength of the March quarter in conjunction with the quite weak December quarter last year. In that context, the picture is not as strong as what the headline number is suggesting.

“The economy is looking okay, but there are still risks to the outlook particularly from the household sector and from house prices. They are the key risks for us. On the other hand, the business sector is looking like it’s in a good shape and the public sector is strong too.”

MARKET REACTION:

The Australian dollar AUD=D4 rose about a quarter of a U.S. cent to around $0.7660 after data showed Australia's economy grew 1.0 percent in the first three months of this year from the preceding quarter, beating market expectations.

BACKGROUND:

*The median forecast favoured a brisk rise of around 0.9 pct in GDP, though they ranged from a 0.6 pct to 1.1 pct gain.

*GDP was seen up around 2.8 pct on the same quarter last year. The range was 2.6 to 3.0 pct.

*Early data implied exports, business inventories and government spending added to growth while household consumption also made a reasonable contribution.

*Major doubts surround the sustainability of household consumption as record-low wages growth and punishingly high levels of debt weigh on spending power.

*Nominal GDP was set to see a sizable increase thanks to gains in commodity prices and mining profits, though the best of that seemed to be over.

*Measures of domestic inflation were expected to remain subdued with retail prices pressured by intense competition and plenty of slack in the labour market.

Reporting by Swati Pandey; Editing by Eric Meijer and Kim Coghill

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