Australia: Economy grew by 0.8% in Q2 - Westpac

Andrew Hanlan, Research Analyst at Westpac, notes that the Australian economy grew by 0.8% in Q2 as conditions rebounded from a weather disrupted 0.3% rise in Q1 while annual growth was steady at 1.8%.

Key Quotes

“Real GDP growth in Q2 was 0.8%qtr, 1.8%yr. That was weaker than ‘final’ expectations (market median 0.9% and Westpac 1.0%)”

“The quarterly profile for GDP has been a choppy one over the past year, with conditions impacted by one-offs and weather disruptions. The four quarter profile for real GDP is -0.4%, 1.1%, 0.3% and 0.8%. Annual GDP growth will move higher in Q3 as the -0.4% for September 2016 drops out of the calculation.”

“The main surprise:

• The main and critically important negative surprise was around household spending and wage incomes.
• Nominal wage incomes grew by 0.7%, undershooting the quarterly partial which was 1.2%. With employment up 1.0% in the quarter, this implies that the average compensation of employees contracted, -0.3%qtr to be 0.3% below the level of a year ago. This highlights the compositional shifts in the mining states, towards lower paying jobs, and the underlying weakness of wages growth.
• Consumer spending grew by 0.7%, vs an expected 1.0%, and annual growth is little changed, at a lacklustre 2.6%. Households did draw on their savings, with the household saving ratio moderating to 4.6% from 5.3% in Q1.
• The consumer spending detail showed retail components largely as expected based on the strong retail sales result for the quarter (+1.5%) but weaker than expected spending on vehicles (down 1.1%qtr despite monthly sales numbers pointing to a solid quarterly rise) and on services. Within the services component one of the standout weak spots was ‘electricity, gas and other fuel’ which saw spending contract 3.8%qtr, the largest quarterly decline since September 2012 when the carbon tax was introduced. The fall appears to be due to weather conditions - higher than usual heatwaves increasing electricity consumption in Q1 then a warm, mild winter seeing reduced heating requirements in Q2 – rather than recently electricity price increases which only came into effect in July.
• There were some other downside surprises relative to our final expectations, including public demand 1.8% vs a f/c 2.2%, and business investment a 1.1% vs a f/c 1.3%.”

“Overview

• Overall domestic demand grew by a solid 1.0% in the quarter to be 2.4% higher over the year. Conditions rebounded from weather disruptions in Q1 and were supported by an upswing in public investment, gains in business investment and a resumption of growth in exports. However, home building was broadly flat and the consumer picture was disappointing.
• Public demand expanded at a brisk pace, up 1.8%, to be an above par 3.7% higher over the year. Key is an upswing in public investment,  4.5%qtr, 8.2%yr.
• Business investment increased by 1.1% in the quarter. That is the third consecutive positive quarter (1.4%, 2.2% and 1.1%). The mining investment drag has waned and non-mining sectors have lifted investment somewhat.
• Over the year, business investment increased by 1.5%, the first positive annual result since March 2013.
• Home building activity was broadly flat, +0.2%qtr, ahead of a looming downturn heading into 2018, with approvals around 12% below the levels prevailing in the first half of 2016.
• Exports advanced +2.7%qtr, rebounding from a weather disrupted 2.2% fall in Q1. Exports are set to expand further in the year ahead as additional capacity comes on stream and as services continue to increase at a solid pace to meet rising demand from Asia. Net exports swung from a -0.9ppt impact in Q1 to a +0.3ppt impact in Q2, but over the year, net exports are a negative at present, at -0.4ppts.
• As to national income, note that nominal GDP was broadly flat in the quarter, -0.1%, with the terms of trade declining by 6.0% on a dip in commodity prices. However, over the past year, the terms of trade is still up 14.9% and nominal GDP growth is an above par 6.3%.”