Market Watch

Market Strategist Evan Lucas recaps the highlights and lowlights of fourth-quarter GDP.

Geopolitics is peaking. The new steel and aluminium tariffs signed off by the White House on Friday morning stipulate that nations have 15 days to ‘negotiate’ exemptions.

There is a hope that our Great Southern Land will get an exemption, being a ‘great and trusted friend’ of the US. However, even if we are exempt, the trade war has been lit – and it is clearly aimed at our biggest export trading partner China.

More questions than answers arise here:

  • Will this end up in the international courts?
  • What level of retaliation (if at all) will the US see?
  • Will tariffs spread to other industries, such as manufacturing?

Geopolitics is clouding the market outlook as it will now directly impact global economic outputs. In a year that synchronised global growth is materialising and likely to peak, this is very much an unwanted scenario. The only certainty from a markets point of view is intermittent volatility.

Looking back on the Australian data of the week, it was all about the fourth-quarter GDP. The headline numbers were a touch soft, where quarter-on-quarter growth of 0.4 per cent, and year-on-year of 2.4 per cent, both came in below expectations. 

The bear view is that per capita growth was 0 per cent, and without government investment, GDP would be in the doldrums. However, this cynical view is a little simplistic as it overlooks the granular data that is showing strength.

Net exports were the main detractor, which took -0.5 percentage points out of the GDP figures. This was flagged in Australia’s Current Account deficit data released the week before. Engineering investment also fell off and hit private investment. This too was flagged earlier in the Construction Work Done release of mid-February that outlined the completion of North-West Shelf LNG projects.

Consumption is the bright spot. It added one percentage point to the overall GDP story. This is likely due to the strong employment figures in 2017 which are credited with bolstering disposable income which grew 3 per cent over the year. 

The catch is, wage pressure hasn’t materialised from employment growth – which isn’t news – and the saving rate dropped to 2.7 per cent over the year. However, it is clear the ‘optimism’ that was being recorded in PMI and survey data in the December quarter translated into actual economic results.

Private investment remains the mixed bag, and here dwelling and mining investment are millstones to investment growth. However, non-mining and business investment growth was solid, and these economic actuals support what was seen in the capital expenditure releases at the tail-end of the calendar year. Commercial construction added 3.3 per cent in the December quarter, and machinery and equipment added 3 per cent over the same period.

Looking to first-quarter 2018, there are cautionary signs the household saving rate may impact consumption, despite Australia coming off a stellar year for employment. The early labour prints in 2018 have shown large declines in hours worked. Discretionary spend is facing a squeeze, however, the early trade balance figures for this quarter were positive and we may see net exports snapping back.

There are many push-pull forces at work here. Although Australia is part of the synchronised global growth story, we aren’t following that narrative consistently and as closely as we could.  


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