PORTFOLIO POINT: March quarter GDP growth was surprisingly strong, but it’s likely to prove an aberration and won't prevent further rate cuts.
Australian GDP rose by a surprisingly strong 1.3% in the March quarter, resulting in an annual rate of 4.3%.
This is roughly double consensus expectations.
The key drivers of the upside surprise were household consumption, which grew by a very strong 1.6%, and a 19.7% rise in new engineering construction, which is mainly mining-related.
These numbers are great news and highlight that Australia is much stronger than comparable developed countries (e.g. while Australia grew 4.3% over the year to the March quarter, the eurozone was flat, the UK contracted 0.1%, the US grew 2% and Japan grew 2.7%).
However, our assessment is that it would be very dangerous to assume that this sort of growth will continue. Sure, the mining boom has a way to go, but more timely data for April and May suggest that retailing, housing-related activity, manufacturers and services sectors are continuing to struggle, pointing to a return to softer sub-trend growth in the current quarter and beyond.
It’s also worth noting that much of the strength in consumer spending related to strong gains in normally volatile services-related items – such as health, transport and education – which are likely to fall back in subsequent quarters.
In other areas, the household savings rate remained high at 9.3%, productivity growth was 1.9% in the quarter (3.9% over the year) and state final demand growth continued to highlight the two-speed economy, with WA up 14.5% over the last year and the Northern Territory up 16.9%, but NSW growing just 1.9% and Tasmania contracting 0.8%. Additionally, the terms of trade has fallen for two quarters in a row and measures of inflation were low and falling (e.g. the household consumption deflator is up just 1.4% year-on-year).
With March quarter growth likely to prove to be a bit of an aberration (just as the March quarter contraction in GDP was last year), real gross national income softening and inflation low, our view remains that the RBA has more to do in terms of cutting interest rates. Following the RBA’s 25 basis point cut to 3.5% on Tuesday afternoon, we see the cash rate falling to around 2.75% by year end.
Dr Shane Oliver is head of investment strategy and chief economist of AMP Capital Investors.