Australia: Very different way to produce 3% GDP growth - Westpac

Sean Callow, Research Analyst at Westpac, notes that last week we received positive surprise, with Australia’s headline growth of 3.1% y/y easily above consensus.

Key Quotes

“Our economists note that 3.1% growth is above trend (the estimated fastest sustainable rate) of 2.75% and is the swiftest growth pace since Q3 2012. But the economy is very reliant on net exports, contributing 1.1 percentage points in Q1. The rest of the economy was decidedly mixed. Domestic demand grew only 0.1% q/q, 0.9% y/y. This was comprised of moderate growth in consumer spending, very small contributions from residential construction and public spending and another sharp fall in business investment, as the mining sector continues unwind its previously massive investment levels.

Australia’s overall real GDP growth has run well above domestic demand for some time. Indeed, over the past 20 years, GDP growth of 3% has typically been associated with even stronger domestic demand, with net exports lagging. That would be a textbook economic boom: robust domestic spending and incomes drive up demand for imports (wider trade deficits) and push up the exchange rate.

We are currently experiencing a very different way to produce 3% GDP growth. We have mentioned the weakness in wages growth before, including the concern it would be raising at the RBA about falling inflation expectations. The national accounts showed broad-based weakness in prices, with the overall price level falling in both the quarter and the year. Nominal (actual) growth was just 0.5% q/q, 2.1% y/y. Deduct population growth and no wonder people don’t feel as upbeat as previous episodes of 3% GDP growth.”