G’day, forex mates! Another RBA statement is coming up. And if that made you wonder how Australia’s economy has been doing recently, then today’s Economic Snapshot may be just what you need.
- Australia’s GDP grew by 0.3% quarter-on-quarter in Q1 2017 GDP.
- This is much slower than the 1.1% quarterly growth registered in Q4 2016.
- Net trade was the biggest drag on growth due to exports falling by 1.6% and imports rising by 1.6%.
- The 2.7% slump in government investment (+14.1% previous) was also a drag after being a major driver in the previous quarter.
- And while household spending was a driver, it did weaken by a lot (+0.5% vs. +1.0% in Q4 2016), which also contributed to weaker GDP growth in Q1.
- Private investment, meanwhile, was flat because the 4.4% drop in residential investment and the 3.0% fall in machinery and equipment were largely offset by the 4.4% increase in non-residential investment.
- Year-on-year, Australia’s GDP expanded by 1.7% in Q1 2017.
- This is the weakest annual rate of expansion since Q3 2009.
- The weakness was broad-based but trade was also the main reason for the slower annual growth since exports grew at a weaker rate (+5.6% vs. +8.9% in Q4 2016) while imports ramped up (+7.9% vs. +3.3% in Q4 2016).
- The harder drop in private investment was also a major drag (-3.8% vs. -2.6% in Q4 2016).
- Household spending also eased a bit (+2.3% vs. +2.6% in Q4 2016), resulting in a weaker positive contribution to annual GDP growth.
- Australia’s seasonally-adjusted jobless rate ticked lower from from 5.7% to 5.6% in June.
- This is the best reading since May 2013.
- Even better, the jobless rate improved even as the labor force participation rate ticked higher from 64.9% to 65.0%.
- This is the highest reading for the participation rate since January 2016.
- Moreover, the number of unemployed blokes and shielas fell by 3.7K, even though the participation rose.
- This means that the Australian was able to absorb the influx of fresh and returning workers (and them some).
- In terms of job growth, the Australian economy only generated a net increase of 14.0K jobs in June.
- This is the weakest jobs growth in four months.
- On a more upbeat note, Australia has been generating jobs for nine consecutive months already.
- In addition, Australia generated 62K full-time jobs in June.
- This marks the second month of growth in full-time jobs.
- Unfortunately, part-time jobs fell by 48K.
Inflation & Wage Growth
- Headline CPI rose by 0.2% quarter-on-quarter in Q2 2017.
- This is the weakest reading in five quarters.
- And the weakness was broad-based to boot since 6 out of 11 components printed decreases, 1 was flat, while only 4 printed increases.
- Year-on-year, headline CPI advanced by 1.9%, which is slower than the 2.1% printed in Q1.
- This puts an end to three consecutive quarters of better annual readings for CPI.
- In addition, the reading missed the RBA’s forecast for a 2.0% year-on-year rise.
- Moreover, the dip means that headline CPI is now no longer within the lower bound of the RBA’s target range.
- And for reference, the RBA’s target range for annual headline inflation is 2-3%.
- As for the trimmed mean inflation, which is the RBA’s preferred measure for core or underlying inflation, it printed a 0.5% quarter-on-quarter increase, which is the same pace as last time.
- Year-on-year, core CPI rose by 1.8% in Q2, matching the downwardly revised reading for Q1 (+1.9% originally).
- Moving on to wage growth, total hourly rates of pay (excluding bonuses) in both the private and public sector increased by 0.5% quarter-on-quarter during Q1 2017.
- This is a tick faster than the +0.4% reported in Q4 2016.
- Wage growth has been holding steady at or around +0.5% since Q2 2015 after trending lower from a peak of +1.0 back in Q1 2012.
- Year-on-year, the wage price index increased only by 1.9%, which is the same pace as in Q4 2016.
- This is the shared weakest year-on-year increase since comparable records began in Q3 1998.
- As for trends, wage growth has been steadily slowing since Q3 2012.
Business Conditions & Sentiment
- The National Australia Bank’s (NAB) business confidence index rebounded recovered slightly to 9 index points in June after dropping to just 8 index points in May.
- Also, business sentiment has been net positive since September 2013.
- NAB’s business conditions index also recovered to 15 index points after falling to 11 index points previously.
- According to commentary from NAB, ” trading conditions (sales) and profitability drove most of the increase.”
- NAB’s labour costs index, meanwhile, is still subdued but continued to trend higher, increasing from 1.0% to 1.2%, which is a promising sign for wage growth.
- Moving on, the headline reading for Australian Industry Group’s (AIG) performance of services index (PSI) jumped to a six-month high of 54.8 in June after falling to 51.5 in May.
- Even better, the improvement was broad-based since all five sub-indices printed better numbers. The wages sub-index, in particular, posted a 4.4 points jump to 56.3.
- Also, service providers are passing on higher input costs because the selling prices sub-index rose by 1.2 points to 52.0.
- AIG’s performance of manufacturing index (PMI), meanwhile, improved slightly from 54.8 to 55.0.
- Despite the slight improvement, the wages sub-index fell by 1 point to 60.0, which is still elevated.
- Even so, manufacturers did not pass on their higher input costs because selling prices slumped by 9.1 points to 47.1, which means that some manufacturers even slashed prices.
- AIG cited “strong international competition (particularly from Asia); and struggling local retail customers” as the main reasons why Australian manufacturers chose to slash prices in June.
- Finally, AIG’s performance of construction index (PCI) unfortunately eased from 56.7 to 56.0, putting an end to two months of ever better readings.
- The weakness in the construction sector was broad-based since almost all sub-indices took hits.
- The wages sub-index, in particular, stumbled by 0.6 points to 60.9.
- Despite this stumble, the wages sub-index remained relatively elevated, which is a good sign for wage growth.
- As for business loans, that printed a 0.2% increase in May, which is a slower increase compared to April’s +0.4%.
- Year-on-year, business loans only increased by 3.1%, the same as the previous annual reading.
- This is the shared weakest year-on-year reading since May 2014.
- But on a more upbeat note, business credit has been growing (on an annual basis) since September 2011.
Consumer Spending & Credit
- Retail trade turnover (seasonally-adjusted) in Australia rose by 0.6% month-on-month in May.
- This is a weaker increase compared to April’s +1.0%.
- Nonetheless, this marks the second month of increases.
- And despite the slowdown, 5 out of the 6 major retail store types reported growth in trade turnover.
- Also, unless retail trade turnover plunges by 3.9% month-on-month in June, retail trade will likely have a positive contribution to quarter-on-quarter Q2 GDP growth.
- Year-on-year retail trade turnover increased by 3.3%.
- This is the strongest annual reading in 7 months.
- Moreover, this marks the third month of ever stronger annual readings.
- As for personal loans, both the monthly and annual readings were in negative territory again in May.
- Personal credit, on both a monthly and yearly basis, has been falling since January 2016.
- On a monthly basis, personal credit fell by 0.1% in May, the same as in April.
- Year-on-year, personal credit slumped by 1.4%, which is a slightly softer tumble compared to the 1.5% decline suffered in April.
- Housing loans to owner-occupiers continue to grow at a faster pace in May, printing another 0.6% month-on-month increase (+0.5% previous).
- Year-on-year, this translates to a +6.1%, which is the a shared lowest reading since September 2015.
- As for housing loans to investors, they increased by another 0.5% month-on-month in May, which is slowest increase in nine months.
- Year-on-year, housing loans to investors grew by 7.5%, which is the highest reading since December 2015.
- Also, housing loans to investors have been steadily picking up the pace after bottoming out at an annual pace of 4.6% back in August 2016.
- This may mean that speculative pressure on the Australian housing market is still picking up, increasing the chance of a housing bubble.
- Trend wise, overall housing credit accelerate to +6.6% year-on-year, which is a 10-month high.
- Total housing credit bottomed out at 6.3% back in November 2016 and looks like it has been slowly rising since then.
- As for the total dwelling units approved in May, that fell by 5.6% to 16,448, thanks largely to the 12.1% slump in private sector dwellings excluding houses.
- Australia seasonally-adjusted trade surplus widened to $2,571 million in May.
- That’s in Aussie dollars, by the way.
- This marks the seventh consecutive month of surpluses.
- The wider surplus was due to exports rebounding by 8.5% after plunging by 7.5% in April.
- The 0.7% contraction in imports, which is bigger than the 0.4% fall in April, also helped a bit.
- However, the rather small surplus in April means that trade will likely be a drag on Q2 GDP, at least on a quarter-on-quarter basis.
Putting it all together
The RBA forecasted in its May Statement on Monetary Policy that GDP will print an annual growth rate of between 1.5% to 2.5% by June 2017, which is by the end of Q2 effectively.
And so far, GDP growth is on track to meet the RBA’s forecast range since GDP expanded by 1.7% year-on-year in Q1 2017, even though that’s the weakest rate of annual growth since since Q3 2009. As such, the RBA likely won’t switch to a more dovish tone despite the slowdown.
Looking forward, GDP growth could potentially maintain its pace (or better) since retail sales were stronger in Q2 compared to Q1, which will likely give consumer spending a boost. Also business conditions and sentiment were relatively elevated in Q2, which may translate to higher business investment. Also, housing credit by investors continue to grow and overall housing credit grew during the available Q2 months.
However, poor readings for trade in April will likely be a drag on Q2 GDP growth, unless we see a solid growth in exports in June (or imports contract significantly).
Moving on to inflation, headline CPI came in at 1.9% year-on-year in Q2, missing the RBA’s forecast of +2.0%. However, trimmed mean inflation, which is the RBA’s preferred measure for core or underlying inflation, rose by 1.8% in Q2 and is in-line (slightly better, in fact) with the RBA’s forecast of +1.75%. Inflation is therefore a mixed picture, since headline inflation is a slight miss while underlying inflation is still evolving in-line with the RBA’s forecast.
Looking forward, the pickup in wage growth in Q1 may continue in Q2 since anecdotal evidence gathered by AIG and NAB point to stronger wage growth in Q2, as well as signs that companies are passing on their higher input costs by raising selling prices. Time will tell if the pickup in wage growth will lead to higher inflation.
As for the labor market, it’s been pretty robust overall, according to the official numbers. The jobless rate even came in at 5.6% in June, which is better than the RBA’s forecast of 5.75%.
Overall, the Australian economy had some hiccups in terms of growth and headline inflation, but these are still roughly within the RBA’s forecasts. As such, the RBA likely won’t become extra dovish, unless they identify new risks to their outlook which were not already identified in the May Statement of Monetary Policy.