Weekend Economist: GDP surprise?

Expenditure figures offer some hope of the national accounts beating expectations, but recent business surveys temper that optimism.

The Australian national accounts, to be released on Wednesday June 4, will provide an estimate of economic activity in the first quarter.

The economy gained momentum at the turn of the year. GDP growth printed at 0.8 per cent in the fourth quarter and we anticipate a 0.9 per cent increase in the first quarter. That is an improvement from an average of 0.65 per cent over the initial three quarters of 2013.

Risks to our 0.9 per cent forecast would appear to be skewed to the upside, gauging from available information on the expenditure components. However, this is tempered by other indicators, such as private business surveys.

Our forecast for first quarter GDP growth of 0.9 per cent lifts annual growth from 2.8 per cent to a "trend" 3.2 per cent, the first result at 3 per cent or above since third quarter 2012, when mining investment peaked.

Historically low and declining interest rates in 2013 ignited a burst of consumer spending. We expect consumer spending growth of 0.8 per cent in first quarter, a repeat of the fourth quarter outcome, lifting annual growth from 2.6 per cent to 2.9 per cent, the strongest result since third quarter 2011.

Exports are boosting growth, as the mining boom moves into the output phase, and imports have weakened, in part due to a downturn in capital imports. We calculate that net exports in first quarter will add 0.9 percentage points in the quarter and 2.1 percentage points for the year.

Housing is at the start of a strong upswing. Record low rates have led to record high approvals. New dwelling construction jumped by a reported 7.8 per cent in the first quarter.

Conditions elsewhere were mixed. In the first quarter, domestic demand growth is forecast to be 0.6 per cent for the quarter, 2.1 per cent for the year. We anticipate a pull-back in public demand. Business investment is likely to report only a modest rise following a sharp fall in fourth quarter, limited by the downturn in mining investment. While inventories are expected to subtract from growth as the bumper winter crop in WA is exported.

The national accounts commend themselves by providing a detailed overview of the Australian economy. However, the information is somewhat dated. Recent developments suggest the economy may have lost momentum heading into the June quarter. It is telling that, in their May statement on monetary policy the Reserve Bank of Australia lowered its GDP growth forecast for June 2015 to 2.75 per cent (a sub-trend pace) from 3.0 per cent in February.

Record low interest rates are a key tailwind for growth, but the economy remains constrained by a number of headwinds. In particular: a tightening of fiscal policy; a slowing of growth in China, triggering a dip in our terms of trade; a still high currency; and a downturn in mining investment. Consumer sentiment fell from 99.7 in April to 92.9 in May, in the wake of the Federal Budget, down from a high of 110.3 last November. This retreat in confidence points to the risk of a dip in consumer spending growth.


Household consumption (0.8 per cent): Consumer spending is forecast to increase by 0.8 per cent in first quarter. Real retail sales grew by a reported 1.2 per cent in the quarter following a 1.1 per cent rise in fourth quarter. However, motor vehicle sales softened in the quarter, down 2 per cent, following a flat fourth quarter. We expect solid growth in spending on services.

Dwelling investment (5 per cent): An upswing in housing construction is underway, with approvals exceeding the peak of ten years earlier. New dwelling construction, after a broadly flat 2013, increased in first quarter by a reported 7.8 per cent and renovation work was up 1.9 per cent.

New business investment (0.7 per cent): Following a 3.4 per cent slump in fourth quarter, as business "froze spending", we anticipate a modest 0.7 per cent increase in first quarter. Infrastructure work edged lower, as mining investment turns down, and we expect a drop in exploration activity to drive a fall in the intellectual property products segment. Offsetting this, non-residential building work rose and equipment spending staged a partial rebound.

Public spending (–0.8 per cent): A see-saw pattern in public investment is expected to continue, with a 5 per cent drop in first quarter reversing a 4.6 per cent bounce in fourth quarter. Consumption is expected to remain soft as governments seek to constrain expenditures.

Net exports (0.9 percentage points): Export volumes expanded by an estimated 3.0 per cent in first quarter on increased shipments of iron ore, coal, gas and rural goods. Imports declined by an estimated 1.2 per cent, with falls in capital goods and services offsetting modest rises in consumption and intermediate goods.

Private non-farm inventories (–0.5 per cent, 0.0 percentage point contribution): We anticipate a further run-down of inventories, given the focus on cost control and the softness of imports relative to spending. The business indicators survey (Monday), the balance of payments (Tuesday) and public demand data (Tuesday) will provide further clues as to the risks surrounding our forecast for GDP (published Wednesday).

Andrew Hanlan is senior economist with Westpac.

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